The Market Failure - Term Paper Example

 The Market Failure Abstract Market failure is a common economic condition because of ineffective or inefficient production and use of good in the market. Market performance depends on so many parameters like economic conditions, consumer trends, governmental policies etc for its effective functioning. Market failures cause problems to the product manufacturers, service providers, consumers and even for the governments. A healthy market is one which acquires a balance between supply and demand. When an imbalance occurs between supply and demand, the market may consider as going through the failure phase. Market Failure Market is not an absolute entity. It undergoes relative changes every time because of its association with so many internal and external parameters. In other words, market fluctuates all the time when any problems may arise to the associated entities of the market. Market often fails when the individual interests try to dominate over the general interests of the market. For example, China is accused of implementing unhealthy strategies in the market. China is concentrating on mass productions of goods. They were able to sell their goods for cheaper prices because of the mass production. The cheaper prices will definitely attract the consumers and they will purchase more and more goods of Chinese origin. Even though the profit obtained from selling a single unit may less, China was able to overcome such problems by selling huge volumes of goods. Moreover huge volume of production may mobilizes the economic resources of China and also the unemployed youths in China may get more employment because of the healthy movement of Chinese products in the world market. On the other hand, the consumers who purchased cheaper goods of Chinese origin may realize latter that the goods they purchased was not adequate quality. When they face troubles with the products they purchased, they would try to look suspiciously at other genuine products also produced by other manufacturers. The reluctance of the consumers to enter actively in the market may cause problems not only for the China, but for other countries as well. In short, the market may fail in such cases because of the inefficient production and distribution of goods by even a single entity. “If a free market gives us too many of some type of good, or too few of another type of good, we are either over-allocating or under-allocating our resources. In the case of market failures we are productively inefficient and/or allocatively inefficient” (Market Failures, http://elmo.shore.ctc.edu/economics/market.htm) As mentioned earlier, market performance is often depends on the supply and demand. There should be balance between supply and demand for the smooth functioning of markets. For example, Indian car manufacturer TATA group recently launched a car worth of $ 2500 only. “Over the past year, Tata has been building hype for a car that would cost a mere 100,000 rupees (roughly $2,500) and bring automotive transportation to the mainstream Indian population” (The New York Times, November 11, 2009, Automobiles, http://wheels.blogs.nytimes.com/2008/01/10/tata-nano-the-worlds-cheapest-car/)The so called ‘Nano’ car was aimed at the medium income people of the Indian market. In the initial month itself, they got booking for around 1 million units of Nano from various Indian states. Looking at the number of booking they received in the initial month, if TATA is going for double the production of ‘Nano’, it may result in a market failure conditions most probably. In other words, too many goods of one kind or a too many goods beyond the demand may cause more harm to the market rather than the benefits. On the other hand, think of a scenario in which the TATA group failed to manufacture adequate number of cars even after getting positive feedbacks from the market. In such a situation, also the market may fail because of less supply compared to the demand. Less supply would mean that the price may go up. When the prices go up the real charm or the attraction of the Nano car may lost and its future selling prospects may be affected. Thus the balance between the supply and demand is the ideal market condition for the consumers, manufacturers and the government as well. Market failure may depend on the market power and competition. “Market power is the ability to influence the market price” (Market Failures, http://elmo.shore.ctc.edu/economics/market.htm). For example, monopolistic firms often succeed in controlling the prices of their products in the market. For example, the consortium of OPEC countries often adjusts the price of crude oil based on the market demand. The oil prices which were around $ 150 per barrel around three years before has come down to around $ 30 per barrel when the global economic crisis reached its peak. In other words, when the demand and price was high, OPEC has increased their production to achieve more profits whereas when the demand has decreased, they have reduced the production and also the price. The oligopoly enjoyed by the OPEC made them capable of controlling the market in this way. Such a huge influence of a monopolistic power on market is not a healthy condition for the market as some segments may take undue advantages because of their monopoly. In the consumer’s point of view, competition in the market is always good for them. Competition forces firms to cut down their prices and also encourage them to spend more on research and developments which will result in the invention of new products. Externalities are another factor which causes failure to the market. Externalities are the third parties involved in the market apart from the consumers and manufacturers. Externalities would be useful only to the third parties who have nothing to do with either the production of goods or the utilization of it. “Main problem associated with the market is the absence of clearly defined property rights for those agents operating in the market. When property rights are not clearly defined, market failure is likely because producers & consumers may not be held to account” (Tutor2u, economics of market failure, http://tutor2u.net/economics/content/topics/marketfail/market_failure.htm). For example, the current economic crisis has caused immense damages to the American economy which forced the public to cut down their expenses. Thus they forced to purchase cheaper products produced by China which in turn helped China to stay in the American market amidst the current recess in global economy. In other words, China, the third party has got the advantage of the economic crisis in America which is not a good sign for the American market. For the Americans if their products move well in their market, then it would be a healthy sign. On the other hand Chinese products moving well in American market is not a good sign for America. Public goods are another factor which can adversely affect the market. Public good means anything which provides utility to the public irrespective of whether they pay for it or not. Thus, apart from the manufacturer or the consumer, a third segment of public also enjoys the benefit of the public good, without paying a single dollar. For example, space exploration is an expensive act and only the developed countries like America, Russia, China, and India are spending heavily for the space exploration. But the information gathered from such explorations is available to the global public without spending even a single dollar. For example, recently, India’s moon exploration has succeeded in finding out the presence of water in Moon. This information is useful for other nations even though they have not spent anything for obtaining that information. In economic point of view, it is a market failure condition since apart from the consumers and the manufacturers a third segment is taking undue advantages. “The classic example is a lighthouse. All ships will benefit from using it and would be willing to pay for it, but once it is in place there is no way of excluding non-payers from using it. Rationally self-interested people would not continue to pay for something they can get without having to pay for it. Therefore, no profit seeking firm would build it in the first place. This results in a free market under providing these kinds of goods” (Market Failures, http://elmo.shore.ctc.edu/economics/market.htm).It is the duty of the government to interfere effectively in the market whenever the market fluctuates heavily. Governments can make necessary modifications in their policies when they feel the market is going to fail. For example, taxes, interest rates, etc are some of the parameters government can adjust in order to streamline the market in the right track. Sub topics – Complementary goods If two goods are brought together and used together they can be referred as complementary goods. It is not possible for either of the two goods to function effectively if only one of them is purchased by the consumer. For example computers and software are complementary goods. It is not possible for either the computer or the software to function properly without the mutual help. Oligopoly Oligopoly is a market conditions in which a small number of sellers able to control the market activities effectively. Such firms will form a consortium for executing their policies and to safeguard their business interests. The consortium of Oil and Petroleum Exporting countries (OPEC) is one of the best examples of the oligopoly in the current world. Oligopoly avoids competition between the sellers and it concentrates on profit maximization policies based on the changing market conditions and the changing consumer trends. Tariffs Tariff is a government duty imposed on imports or exports to stimulate or dampen economic activity (Business Definition for: Tariff, BNET Business Dictionary http://dictionary.bnet.com/definition/Tariff.html) It is the duty imposed on goods when they cross the borders of a country. It is normally associated with the trade policies and agreements between countries. For example, India has recently signed a contract with the ASEAN countries for trade activities. Because of this signed agreement the Indian government should reduce the duty of the goods they import from the ASEAN countries. At the same time Indian products would also get the benefit of tariff reduction when they enter in ASEAN countries. Areas for further research Globalization and liberalization has succeeded in destroying traditional concepts about business. The selfish motives of independent growth prevailed in the traditional world has given way for collective growth strategies because of globalization. Man is a social animal and nobody has existence if he/she isolate from the main streams of the community life. The world also has realized the above principle and the need for mutual cooperation for their economic growth. The traditional economic laws have been failed in the current world which needs to be redefined as per the needs of the changing world. In my opinion, further research is essential to find out the suitable strategies necessary to reap the benefits of globalization. Free trade concepts also are a controversial subject for the current economic world. How much a country can open their market for foreign products is a hotly debated topic among the economists. Proponents of free trade foresee no harm in completely opening the market of a country for foreign investment whereas critiques believe that such a policy would be suicidal as the foreign companies are motivated only by the profit making mottos and hence they would try to exploit the natural resources as much as possible for maximizing their profit. The question of how much percentage a country can open their market need to be researched further before arriving at immature conclusions. Works Cited 1. “Business Definition for: Tariff, BNET”. 2009. Business Dictionary. 11 November 2009. 2. “Market Failures”. 11 November 2009. 3. Tutor2u. “Economics of market failure”. 11 November 2009. 4. The New York Times. November 11. 2009. “Automobiles” 11 November 2009. Read More