Market Failure

In certain circumstances, the functioning of the market may be imperfect , for example, if the production factors are not used to achieve the greatest success for the economy as a whole. The market out of supply and demand then leads to undesirable side effects.

If there is a market failure , for example in the case of public goods, external effects or monopolies, the state intervenes. It attempts to prevent disadvantages of suppliers or consumers or to achieve more meaningful results from a macroeconomic perspective.

Support from the state

The state supports financially development and research work by companies in order to convince them to carry out fundamental research. For an individual company, this can result in high costs. However, the know-how is improved throughout the national economy . And other companies are benefiting from this. Without these state measures, companies would presumably do less research because only the research company would bear the costs, which would also benefit the competitor if, for example, patent rights expire after a certain time. The development of the economy as a whole can however have a low impact on research and lead to disadvantages of locations in international competition.

Example financial crisis

At the end of 2007, there was a financial market crisis that grew into a global economic crisis. The market mechanism on the capital and money markets no longer led to an optimal result. The lending within the banks almost came to a standstill, which led to the collapse of the international banks.

Only by the state intervention with

 

• Guarantees,


• Participations in banks and


• Financial assistance to the credit institutions (financial market stabilization fund)

The "credit line" and ultimately the breakdown of the entire banking system could be prevented.

Market failure of public goods

In the normal case the market works like this: A good is manufactured and passed to another at a certain price. If this does not pay the price, he will not receive the good either.

Then there are some public goods that everyone can "consume" without consideration, such as:

• Street lighting


• Fireworks


• Lighthouses


• Dikes


• Peace, national defense


• Climate protection


• Education / knowledge

Nobody has to pay for it, since nobody can be excluded. A firework can be made not only for the people who have paid for it. They also see people who have paid nothing. If someone asked if he would pay 50 euros for the fireworks, he would probably say no because he will see it anyway.

The problem : If nobody is willing to pay for it, it is not offered by anyone. The result is that there is neither street lighting nor a fireworks. In order for the public goods are still available, they have partly provided by the state and the tax financed are.

Market failure for external effects

A market failure also occurs if the polluter does not bear all costs incurred in production. There are then external effects, where the market results have an adverse effect on third parties (not buyers and sellers).

In this case, the market mechanism can not ensure an optimal allocation ( allocation ) of the production factors since they do not reflect the prices or costs.

Example:

If the environmental impact resulting from aluminum production is not included in the cost function, the market is not optimal.

Market failure in competition restrictions

In general, people avoid competition, which is probably due to their nature. Nevertheless, they want to make profits. For this reason, tendencies to the abolition or restriction of competition are repeatedly reflected in the open market economy.

Some of the numerous restrictions on competition are:

• duties


• Quotation and price agreements


• Difficult labor market access


• Import quotas


• Cooperations with competitors


• Monopolies under the protection of the state

These restrictions on competition are responsible for the fact that less is offered for more money. This allows the providers to make above-average profits. The profits are not achieved here by increasing their own performance, but because of competition restrictions. Together with the reduced volume, this has the consequence that the social welfare declines. Economists speak here of "rent seeking" (search for uninvited income). The state can only increase the prosperity of society by limiting these restrictions.

Market failure in asymmetric information

In a model competition, all market participants have complete information about the qualitative characteristics of the products, their usefulness and the behavior of the exchange partners. In practice, however, many market players frequently have information deficits that ultimately contribute to a market failure.

How will you ask questions such as "Mr. Fahrlehrer, do I need even more driving hours to pass the exam?" Or "Frau Apothekerin, I should take a drug against my cough?" Answered? In any case, the respondents will have the incentive to give an answer that will enable them to make further revenue. As a rule, it is difficult for the customers to check the answers because this information is asymmetrical or unequally distributed.