Market failures or market fiasco – English Market Failure, is a situation that arises when the resources available in the market are allocated inefficiently. This economic situation can take many forms and appear in many situations, and it is often perceived as something that must be corrected through government intervention. For example, when the fishing industry experiences a market failure, the government is expected to make a series of policy decisions to address the problem.
When market failures occur, this means that the system is not Pareto efficient ( English Pareto Efficient). Pareto efficiency, on the other hand, refers to a situation in which any improvement in one area would cause a corresponding loss in another area. For example, if a furniture manufacturer reduces the price of its products, which benefits consumers, it will lose part of the profit, that is, it will receive damages equal to the benefit to consumers. On the other hand, a furniture manufacturer may reduce the purchase prices of raw materials to reduce costs and compensate for damages, however, this will result in damages to suppliers of raw materials. That is, when a system achieves Pareto efficiency, it means that it is operating at an optimal level, maintaining the balance of all its elements.
There are many factors that can contribute to market failures. One of the most common reasons is monopolies, since in such a market there is no competition for certain goods or services. Externalities can also be an issue that contributes to market failures, as the final cost of goods and services may not take into account the influence of external factors such as wages or environmental impacts. Some public goods are also seen as a form of market failure.
Social inequality in a society can also lead to market failure, as can many other factors. In all cases, market failure is characterized by the fact that there is a better and more effective way resource allocation, but it is not used. Public goods are often used as an example of market failure. For example, people may argue that private firefighting firms could be more efficient than similar publicly funded public services.
The government can provide various interventions to solve the problem of market failure, for example, by changing legislation, monetary policy, minimum wages and taxation. One problem with government intervention is that it can exacerbate market failures by failing to allocate and allocate resources effectively. Choosing when and how to intervene is a difficult decision that can be complicated by political and social issues affecting the people and institutions involved in decision-making.
A market is a complex of economic relationships between producers and consumers of goods and services, which is often of a firmly established mass nature.
A market is formed where the seller and buyer find each other and express their mutual desires. Some people need goods, others need money. Thus, a market can arise where supply and demand meet. The manufacturer wants to sell the product as expensive as possible, and the buyer wants to buy it as cheaply as possible. These divergent interests emerging in the market are balanced by price. Prices are a source of information about the interests and needs of consumers and stimulate producers to reduce production costs and make the most efficient use of resources available in limited quantities.
If in economic system, interacting with the natural economy and the state, the market has the greatest weight in relation to these two subsystems, which means that such a system is a market one.
Since the market integrates the spheres of production and consumption, stimulates the most efficient production, informs its participants about the mutual position of supply and demand in the market of goods and services, it is a self-regulating system, the most effective and flexible in solving basic economic issues. Therefore, the economy of modern developed countries is of a market nature. He will probably determine future character economies in all countries of the world.
So, the advantages of the market include:
1) the effectiveness of the system in the distribution and use of limited resources in society.
Surpluses of goods and their deficits tend to self-liquidate. For example, if there is a surplus of any product, it will not find demand, its price will be reduced. Production will become less profitable and decrease, and excess goods will gradually be sold off. And the absence of surpluses and deficits indicates the effectiveness of the system: all available resources are spent only on the production of the necessary goods in the required quantities.
- 2) flexibility, the ability to quickly adapt to changing production conditions
- 3) stimulation for the rapid introduction of scientific and technological achievements into production
- 4) economic freedom of consumers and entrepreneurs in decision-making. It contributes to the formation of initiative and development. But it also implies great responsibility. The Russians have encountered this more than once. Everyone is free to invest money in any commercial organization. One of the striking examples was the MMM organization, which brought wealth to some, while other investors, on the contrary, lost their deposits after the demise of its existence and did not receive any compensation.
- 5) rapid self-regulation of balance.
- 6) system integrity
Reacting to external changes, she at the same time remains herself, which contributes to stable social development. It is no coincidence that countries with developed market economies usually have political stability.
However, a market economy also has disadvantages, which are often a continuation of its advantages. Cases in which the market is unable to ensure efficient functioning and use of resources are called market “failures” (fiascos).
There are usually four types of so-called market failures:
1) Monopoly. In a market economy, sellers or buyers often collude or unite with each other in order to manipulate the results of supposedly competition. The market can no longer fulfill its regulatory function.
Monopolies arise due to market development and competition. A monopoly does not allow new firms to enter the industry, controls a certain type of resource, has exclusive rights, for example, to a patent or license, and strives with all its might to maintain its monopoly position (unfair competition).
A monopolist firm produces fewer products, but sells them at a higher price; the market ceases to distribute resources and products in the way that society really needs. In addition, in the absence of a competing product, the monopolist does not seek to improve its products, so the lack of choice is also not in the interests of the buyer.
2) Imperfect (asymmetric) information. Asymmetric information causes the emergence of so-called information search costs, which are among transaction costs(exchange costs). This means that the incompleteness and uneven distribution of information provided to market participants forces consumers and producers to spend time and money searching for potential sellers and buyers. Consumers are often forced to buy goods at a price that does not correspond to the equilibrium price, to buy substitute goods, and producers produce goods in too large or, on the contrary, in insufficient quantities.
Due to uneven distribution of information, low-quality goods can push high-quality products out of the market.
3) External effects. Among the problems that the market mechanism does not solve are the so-called externalities - externalities, a term introduced in 1920 by Arthur Pigou in the book “The Theory of Welfare”. In the presence of external effects, market equilibrium ceases to be effective: “dead weight” appears and Pareto efficiency is violated. Externalities include costs (benefits) from market transactions that are not reflected in prices.
Externalities can be positive or negative. In the presence of a negative external effect, an economic good is sold and purchased in a larger volume compared to the efficient one, i.e. there is an overproduction of goods and services with negative externalities. A positive external effect characterizes a situation when the activities of one economic agent bring benefits to others.
If it is available, the economic good is sold and bought in a smaller volume compared to the effective one, i.e. there is underproduction of goods and services with positive externalities.
Negative effects are associated with costs, while positive effects are associated with benefits for third parties. Thus, externalities show the difference between social costs and private costs.
An example of a positive externality: a farmer installs an irrigation canal on his land plot, as a result of which the quality of neighboring land plots improves without the investment of capital from their owners.
The most well-known negative external costs of production are environmental pollution and wasteful treatment of non-renewable natural resources.
External costs of consumption illustrate bad human habits (tobacco and alcohol consumption).
Participants in market transactions do not take into account external effects when determining the volume of production, consumption, sales or purchases. As a result, too few goods are produced, the production or consumption of which is accompanied by externalities.
Fig.1.
4) public goods. A public good is a good that is consumed collectively by all citizens, regardless of whether people pay for it or not. But the market lacks incentives for the production of goods and services for collective and public purposes. Such goods and services are: defense, public order, public administration, unified energy system, public transport, provision of utilities, etc.
They have a number of properties:
- - they cannot be excluded from consumption without high costs (for example, the lack of an adequate defense system leads to the threat of defeat during military operations or terrorist acts);
- - there is no competition in their consumption (for example, reliable defense or good ecology);
- - participation of the state in the production of these goods.
Pure public goods can be thought of as goods whose production is associated with the occurrence of a wide range of positive externalities.
When such a good is produced for one person, external benefits or external utility also arise for everyone else.
The efficient output of a net public good corresponds to the volume at which marginal social utility equals marginal social cost.
The latter represent the cost of resources required to obtain an additional unit of good.
The efficiency conditions for a pure public good are:
Where MSC is the marginal social cost of producing a unit of good, MSB is the marginal social utility of a unit of good, MB is the sum of the marginal utilities received by each consumer of this additional unit.
The impossibility of distributing public goods through markets is due to the fact that in the absence of forced payment for these goods, producers cannot receive payment from consumers of their products.
All these cases indicate the need for intervention in the state’s economy.
Market failures are cases where the market fails to ensure the efficient use of resources. There are usually four types of ineffective situations that indicate market failures:
· monopoly;
· imperfect (asymmetric) information;
· external effects;
· production of public goods.
1. The presence of monopolies,
primarily natural monopolies, as well as oligopolies in certain sectors of the economy, leading to a lack of competition among producers and harming public welfare and consumers.
This necessitates:
State intervention in the form of creating state and municipal enterprises in industries with natural monopoly and oligopoly,
State regulation and control of prices, production volume and quality of relevant economic goods.
Since monopoly leads to suboptimal use of resources, government intervention can bring about significant improvements. In many cases this is achieved through measures alone legal regulation. They promote free access of competitors to the market or even provide for the division of monopoly firms. In such cases, the role of the public sector is reduced to the activities of legislative and law enforcement agencies.
The situation is more complicated in a situation of natural monopoly. An example would be a city water supply. To bring communications between several competing water supply companies to houses and apartments would mean increasing costs to an incomparably greater extent than the beneficial effect. Dividing a plumbing company into a number of independent divisions usually does not make sense either. It will not provide competition, since each of the divisions will have a monopoly in one of the city districts. At the same time, the costs of operating the water supply system, in particular management, are likely to increase.
2. Another type of market failure is information asymmetry between producers (sellers) and consumers (buyers) of economic goods.
3. External and internal effects
3.1. external effects, or externalities - costs (negative external effects) or benefits (positive external effects) accruing to persons not participating in a specific market transaction.
If someone exploits limited resources without repaying their full value, the costs fall on other participants in economic life. In this case, there is a negative externality.
For example, when an enterprise uses river water for free, polluting it, and those who live downstream are forced to invest in the construction of treatment facilities.
However, positive externalities are not uncommon. If, for example, a farmer built a road at his own expense connecting his farm to a highway, and residents of a neighboring village travel on this road for free, a positive external effect arises.
Problems associated with externalities can be solved on the basis of adequately establishing the rights and responsibilities of participants in economic activities. In practice, this is usually achieved through the legislative and regulatory activities of the state. However, in many cases, it is more expedient to spend state resources not on creating cumbersome control mechanisms, but on directly performing functions that generate positive externalities, or on creating tax regulators for activities accompanied by negative externalities.
In this case, the choice of the optimal form of intervention is determined by the specifics of a particular situation and practical feasibility. In the public sector, as in a private enterprise, it is necessary to carefully compare different options for solving a problem, trying to achieve the desired result at the lowest cost.
In case of negative externalities such as pollution environment, the state introduces appropriate environmental taxes that encourage manufacturers to implement treatment facilities and environmentally friendly technologies. In the presence of positive external effects (in the field of education, culture, healthcare), the state allocates subsidies to producers of relevant economic goods (services) to expand their production and increase accessibility to consumers.
3.2. internal effects, or internals, which are costs or benefits received by one of the parties to a market transaction due to the vagueness of the wording of contracts, which can bring undeserved benefits to one of the parties to the transaction and cause economic damage to the other party. This type of market failure also requires government intervention to ensure a balance of interests of the parties when concluding and executing contracts, being the basis of contract law.
4. Public goods are a set of goods and services that are provided to the population free of charge, at the expense of the state.
The production and distribution of public goods are among the main functions of the state, its primary tasks. This shows the state’s focus on reflecting and realizing the interests of the entire population of the country.
The form in which the state today assumes responsibilities related to public goods was formed only in the twentieth century. Today, the normal functioning of the national economy cannot be imagined without such generally accepted benefits as a free healthcare system, education, external and internal security of the state, social security and insurance. Public benefits include the work of civil defense services, liquidation emergency situations. The significance of public goods lies in the fact that they are needed not by part of the population, but by the entire population.
Regarding the mechanism of production and distribution of public goods, the laws of national economics are powerless - they are not able to work effectively in this area of the market. Therefore, objectively, this task is taken on by the state – the state apparatus.
Public goods are a type of economic goods that have properties opposite to private economic goods (market goods and services). There are:
Pure public goods that the market does not produce at all (national defense)
Mixed public goods (club, socially significant and quasi-public goods) that the market can produce, but in insufficient quantities. The source of their production can be civil society (club benefits (telephone, pay TV, swimming pool)), a municipality or the state on a certain scale (social significant benefits, quasi-public goods in natural monopoly industries).
World experience testifies to the important role of the state in managing socio-economic processes. The modern economy is a “mixed” economy based on market principles for organizing economic life (private property, freedom of entrepreneurial initiative, market methods of distributing limited resources) with the active regulatory influence of the state on the behavior of economic entities.
The need for state regulation of economic processes is due to the inability of the market, through self-regulation, to solve a number of problems that undermine the foundations of the market economic system and reduce its efficiency. In conditions of market competition, so-called "market failures"- situations where an economy based on private property and free enterprise does not ensure efficient use of resources and dynamic development.
Traditionally, market failures include:
Monopoly;
Lack and asymmetry of information;
External effects (externalities);
Production of public goods.
Monopoly, which makes it difficult for other economic entities to enter the market, as well as distorting the market pricing mechanism, is a phenomenon that violates the foundations of the market and the principles of free competition.
In these conditions, the state, through its activities, must ensure conditions for free competition and carry out antimonopoly regulation.
As a rule, it is monopolies that inflate prices for goods and services, and the state is forced to make appropriate adjustments to the prices they set. In some cases, for certain socially significant goods and services, the state acts as a regulator of prices, including those set by non-monopolists, regulating the value of the trade markup or establishing taxation for these goods at a preferential rate.
In market conditions, economic agents act in conditions imperfect(asymmetrical and incomplete) information. This creates inefficiency in market transactions.
Lack of information may block interaction between market participants. The result is incompleteness of markets, manifested primarily in the financial sector. Markets securities and futures contracts as an integral part of the capital market, as a rule, are not comprehensive and perfect. It is extremely difficult to predict long-term changes in them. Moreover, financial markets operate relatively independently from the markets for consumer goods, labor, land and physical capital. All this leads to the fact that most transactions are carried out in conditions of uncertainty.
Typically, the state is unable to completely overcome the problem of incomplete information. But it can partially mitigate the risks of decisions by distributing them among taxpayers, which is not available to private investors. The state can finance long-term investment projects or act as a guarantor for their implementation, introduce compulsory insurance deposits by banking institutions, take other actions that can increase the efficiency of public use of resources.
Information asymmetry manifests itself in many areas of economic activity. Thus, a classic example is healthcare and medical care. When a patient consults a doctor, he relies on him to make a diagnosis and choose treatment methods. The consumer of medical services has no ability to control the manufacturer. If manufacturers were guided solely by the principles of personal gain, then expensive and ineffective medical care would become widespread.
A similar situation is equally possible in the field of education. Here the consumer is forced to choose a manufacturer before the actual service is provided. Payment for services is carried out on the basis of an insufficiently accurate estimate, which is based on assumptions based on existing experience. Information asymmetry also occurs during hiring; The employer obviously knows the capabilities of the job seeker less well than the potential employee himself.
The problem of information asymmetry can be solved without the participation of the state, based on reputation accounting. However, in difficult situations, government intervention, which can take various forms, is more productive. One of them is licensing, which is a prerequisite for the implementation individual species activities, for example, in healthcare, in the provision of educational services, the production of medicines, etc. It's also possible direct state participation in the production of goods and services that are associated with significant information asymmetry. Finally, various tools can be used to prevent information asymmetry or block its consequences. state control over production and sales of relevant goods and services.
The obvious market failure is external effects (externalities)– costs or benefits associated with a specific type of activity that are not reflected in prices. They are called external because they concern not only participants in a specific market transaction, but also third parties.
Distinguish negative And positive externalities. Market self-regulation does not eliminate negative “externalities”, i.e. negative impact of the activities of some business entities on others. An example here is environmental pollution, which brings economic losses to the entire society (river and air pollution). In this case, through administrative fines or additional taxation, the state forces producers to avoid such effects for other market participants.
With positive externalities, the activities of some economic agents bring certain benefits to strangers. Thus, if a person has been vaccinated against an infectious disease, the risk of infection is reduced not only for him personally, but also for those who come into contact with him. In this case, marginal social benefits are greater than marginal private benefits. Another example of achieving a positive externality is the development of education, as a result of which not only individuals, but also society as a whole benefit. If the areas that generate positive externalities were developed solely on the basis of free market principles, there would be an underproduction of the corresponding goods compared to the efficient level.
Benefits that generate positive externalities are created mainly in the areas of education, healthcare and culture. These socially significant benefits have a positive impact on society as a whole, so it is justified government support their consumers and producers by providing tax incentives and subsidies.
The limiting case of activity generating positive externalities is represented by creation of public goods. These are goods produced at the expense of society and consumed by all members of society. They are distinguished by two properties: non-rivalry and non-excludability in consumption.
Non-rivalry means that the good is available to many consumers at the same time, and the marginal cost of providing it to an individual consumer is zero. Under non-excludability in consumption implies technical impossibility or prohibitive high costs of preventing access to the good for new consumers. Goods that have both of these properties are called purely public goods. If at least one of these properties is not fully manifested, there is mixed public good.
Examples of purely public goods are national defense, law enforcement, and legislation. Thus, an increase in population does not require additional changes to the civil, family or administrative code. Laws define the rights and responsibilities of everyone, and the amount of “benefits” received does not depend on the number of “consumers”. At the same time, not a single resident of the country can be excluded from the scope of the legislation, since it is simultaneously addressed to all members of society.
Purely public goods cannot be produced and sold in parts; their production and consumption occurs collectively.
The state is called upon to correct market flaws. Currently, mechanisms for correcting the market mechanism have been developed, tested in various countries. These include measures to maintain macroeconomic balance, while the very concept of “equilibrium” extends not only to economic, but also to social elements, primarily the system of social guarantees for citizens. The main debate is about the scope of such regulation.
Market failures - economic problems that cannot be resolved through the market mechanism.
The market performs its functions most effectively in conditions of economic freedom, which implies:
Freedom of movement of resources;
Code of choice of sellers and buyers;
Freedom of enterprise;
Code of Pricing.
The most important advantage of a market system is that this system is self-regulating. It has its own internal order and is subject to its own laws. However, the tendency to establish equilibrium, inherent in the market mechanism, operates through a constant imbalance, both partial - in individual markets, and general - between aggregate demand and aggregate supply.
Macroeconomic instability manifests itself:
Unsustainable rates of economic growth and the cyclical nature of economic development;
In underutilization of resources, including underemployment;
In instability general level prices and inflation.
All of the above is a consequence not only of external factors, but also a consequence of the imperfection of the market mechanism itself. It's about about functions that are not inherent in the nature of the market and about situations where the market mechanism leads to inefficient distribution of resources from the point of view of society.
Types of market failures:
1. The market mechanism does not provide the economy with the required amount of money. Regulation money supply in accordance with economic needs, and therefore the issue of money is a state monopoly.
2. The market mechanism does not ensure the satisfaction of those needs of society that are not expressed in individual effective demand, that is, do not have a market monetary value. We are talking about goods that are necessary for society, but for which there is no effective demand. Consequently, there is no incentive to produce them. These are public goods. These benefits, when provided to one individual, automatically become available to everyone. Their characteristics are: non-competitive and non-excludable.
3. The market system has an inherent tendency towards monopolization.
Market mechanism stimulates processes that weaken competition:
Each individual manufacturer strives for one form of monopoly or another, which gives rise to the practice of secret collusion of producers and the creation of their associations with the aim of capturing the market;
Technical progress, stimulated by the market mechanism, requires, from a purely technological point of view, large-scale production, which leads to an increase in the size of the firm, both absolute and relative to the size of the market. This leads to the centralization and concentration of capital and production and, as a consequence, to the monopolization of the market.
Thus, the market itself generates a tendency towards monopolization, and monopoly interferes with the effective distribution of resources and spoils the market mechanism. The tendency towards monopolization follows from the logic of competition. The market system cannot counteract monopolization, since this tendency is a consequence of the action of the market mechanism. The market itself creates what kills it.
4. A market economy includes inflation as an inherent characteristic of the market mechanism. As a result of inflation, money depreciates and prices cease to act as market signals.
5. The market mechanism cannot solve the entire set of regional problems. Regions have different amounts of resources (natural, financial, labor). If there is a shortage financial resources It is impossible to use all their other types. The system of moving resources using the market mechanism leads to an outflow of funds from “poor” regions. They are moving to regions with a more favorable investment climate. This leads to further aggravation economic situation"poor" regions.
6. The market mechanism does not ensure the stability of macroeconomic equilibrium and cannot ensure full employment of resources.
7. The market mechanism cannot realize national economic interests in the sphere of international relations. Less developed countries with low levels of labor productivity are deprived of development opportunities.
8. The market mechanism is socially neutral, that is, it is single-variant in terms of income distribution (the strong win and become even stronger, the weak lose). The market distribution of income does not correspond to the social needs of society, splits it and leads to social conflicts. Moreover, such distribution can undermine the future development of society.
9. The market mechanism leads to the existence of external effects (externalities).
State failures- situations when the state (government) is unable to ensure the effective distribution and use of resources. Above we looked at the so-called “market failures”. It is logical to assume that the state should focus its efforts on solving problems that the market cannot solve. These primarily include the production of public goods, regulation and control of natural monopolies, development of income policy, regulation of externalities, etc. However, the likelihood of the government making suboptimal economic decisions is very high.
This is explained by the following circumstances:
1. Lack of information and/or low quality of information on the basis of which decisions are made. Government decisions may be made in the absence of reliable statistics. Moreover, the presence of an active lobby and a powerful bureaucratic apparatus leads to a significant distortion of the available information.
2. A complex and multi-link system for collecting information, making a decision, bringing it to the executor and monitoring the execution of the decision. As a result, information is distorted, decisions are implemented in situations different from those in relation to which they were made, decisions are not implemented, etc. High-quality control with multi-level management is generally impossible.
3. Politicization of economic decisions.
4. Insufficient motivation of management structures. Persons who make decisions and distribute financial flows do not bear personal property liability for the consequences of their decisions. Bureaucracy distributes resources of which it is not the owner. Moreover, if legislative and representative bodies of power depend on the will of society, whose interests are represented, expressed and ensured (the presence of a political cycle), then the bureaucracy is basically autonomous and practically does not depend on the position of society.
5. Forecasting the consequences of economic decisions made by the state is often impossible. Economic agents can and often do not react as expected. Therefore, the final results of government regulatory measures may differ, including diametrically, from their purpose.
As we see, neither market nor command-administrative decision-making mechanisms are a panacea. The second should be used in such a way as not to replace the actions of market forces. However, even without government regulation, balanced economic development in modern conditions impossible to provide.
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