Society, Markets and Rules
Chapter 11: Conclusions: market, business and government
In economics there have been extensive discussions regarding market failure. Market failure as a concept is relatively well developed, and even though full consensus has not emerged, it is clear where the differences of opinion reside. Markets fail whenever there is a natural monopoly such that only a single producer can produce a good or service at low cost because of economies of scale. This can drive prices up much higher than where they should ideally be, at marginal cost. A second occasion where a market fails is in the case of externalities, when costs or benefits are not (sufficiently) taken into account in a market price. When costs of pollution, an example of a public ‘bad’, or societal benefits of education or research, examples of public ‘goods’, are not taken into account, the incentives that private parties are faced with can lead them to consume, respectively, more or less of it than would be beneficial to society. Market failure due to externalities that are not included in the market price can result from ignorance about the effects of producing or consuming a good. There is a particular urge for government to step in when the effects of the prevalence of externalities cannot be prevented from affecting parties not involved in the commercial transaction. When non-excludability combines with non-rivalry a potentially large number of individuals are implicated in the effect of a market failure since there is no limit to the number of people affected.
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