Imperfect competition Only prefect competition makes firms equate marginal cost to price and thus to marginal consumer benefit. Ledger imperfect completion, providers set a price above the marginal cost. Since consumers equate price to marginal benefit, marginal benefit exceed marginal cost in imperfectly competitive industries. Such industries produce too little compared to the efficient level. Increasing the level of competition an imperfectly competitive market would result in higher output produced. This would add more to consumer benefit Han to production cost or the opportunity cost of the resources used.
Economists Arrow and Hahn (1971 :Peggy) regards an outcome as being “efficient” if there no other another outcomes in which, relative to the original outcome, some persons are better off without anyone being worse off. If such “better” outcomes exist, then the original outcome is termed inefficient. Imperfect market failure can be internalized by imposition of a lump-sum tax on a monopolist and supernormal profits are taken as tax. Governments may also regulate pricing for monopolies. Government may impose regulations to control monopolies, Forbidding the formation of monopolies (e. ћ antitrust laws), Forbidding monopolistic behavior (like predatory pricing),Ensuring standards of provision and Ensuring competition exists (e. G. , deregulation) 2. Asymmetric information Under asymmetric information, one party in a market transaction has more information than the other party. For example, a transport operator may know the true quality of the good she/he is selling while the customer does not. According to Whimper and Fining (1999: peg. 108) says that “Information symmetry refers to the fact that the buyer and the seller of a commodity may have different amounts of information about that commodity’s attributes. Suppose that customers want to move goods. There are various operators in the market, some offer high-quality services and some low quality services. If the buyers cannot tell the difference between low and high quality, they will probably be unwilling to pay much for services they always face the possibility of getting a low- quality services. As a result the operators with high-quality services may end up offering them at a price that is lower Han their value, meaning it is unprofitable for those operators to stay in the market.
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According to Hall and Lieberman (2007: peg 240) says under asymmetric information, the existence of the low – quality product drives the high – quality product out of the market. This is a market failure since the market for the high – quality service eliminated even if the customers value it at more than the cost of providing it. 3. Equity, Taxation and public goods. Redistributive taxation includes allocation distortions by a wedge between the price the consumer pays and the price the operator receives.
According to Hall and Lieberman (2007: Peggy) defines goods as “Public good: good that is non-rivalries and non-clubbable; the market cannot, and should not, provide such goods. Private good: good that is rival and clubbable, and is supplied by private firms in the marketplace. Rivalry: situation in which one person’s consumption of a good or service means that no one else can consume it”. Therefore, in the case of public goods, we have goods that society would like to consume but the private market mechanism cannot provide or will underprivileged.
This can be internalized by need to produce merit goods (which are naturally under consumed) at low prices or for free due to four reasons Social justice: they should be provided according to need and not ability to pay, Large positive externalities, for example in the provision of free health services helps to contain and combat the spread of disease, Dependents are subject to their guardians decision which are not necessarily the best, therefore the provision of services like free education and dental treatment is needed to protect dependents from uninformed or ad decisions, Ignorance: The problem of imperfect information makes consumers unaware of the positive externalities and benefits that arise from consumption 4. Externalities Externalities arise if one person’s production or consumption physically affects the production or consumption of others. Many negative externalities result from some kind of pollution. The blaring stereo is noise pollution?the addition of undesirable noise to your environment. Cities pollute rivers and lakes with sewage, and industries pollute them with chemicals. Cars and power plants pollute the atmosphere. As you are about to see, pollution?like other negative externalities?creates inefficiency.
An inefficiency that might result from the production and use of gasoline, which pollutes the air with carbon monoxide and soot, dust and other visible and microscopic solids. Here we assume that the market for gasoline is perfectly competitive. The supply curve reflects the marginal costs of producing gasoline to some firm. We can call this the marginal private cost, since it ignores any costs to the general public, such as the health and environmental damage caused by illusion. Solutions to problems of externalities?both negative and positive?include provision of incentives or disincentives. In the smoke stack instance, there can be fines for the amount of pollution created or cap and trade schemes that do essentially the same thing by adding benefits to firms that reduce pollution.
In the case of positive externalities, such as diverse schools or workforces, there can be incentives to hire women, minorities or persons with disabilities. In the case of swimming, there can be differential tankards for admission to elite swim camps to increase diversity. Above all market failure can be internalized also by the following ways; taxes and subsidies, reallocation of property rights, assignment of liability, direct regulation and creative designs of incentive structures by the public sector. Each of these remedies entails some form of government regulation or government intervention. That markets fail is indisputable. That government intervention is a remedy to market failure is established.