MARKET FAILURE

MARKET FAILURE

The market mechanism fails to allocate resources efficiently is known as market failure. Therefore economic and social welfare may not be maximsed. This leads to a loss of economic efficiency.

Reasons for market failure

Public goods and merit goods are not supplied in sufficient quantity by the market.

Immobility of factors of production

Lack of competition

Poverty and inequality in an economy

Information failure

Existence of external costs and benefits

Goods are differentiate

Private Costs

                 Cost to an individual by the production or consumption of a product.

                 PC = SC – EC

Private Benefits

                 Benefits to an individual by the production or consumption of a product.

                 PB = SB – EB

External Cost

                Cost to the third parties by the economic activities of others.

                For example, if someone smoke cigarettes in public places, this may have a number of adverse

                effects on others.

                EC = SC – PC

Social Cost

               It is the total cost to the society of the production or consumption of a product.

              SC = EC +PC

Social Benefits

              The total benefits to society of the production or consumption of a product.

              SB = EB + PB

Budget

              The budget is a simple balance sheet, which shows income and expenditure of the government.

Surplus Budget

             In a financial year when public revenue exceeds public expenditure, a budget surplus arises

Deficit Budget

             In a financial year when public expenditure exceeds public revenue, a deficit budget arises.

Zero/Balanced budget

            When the estimated public expenditure equals to estimated public revenue, it is called balanced

             budget.

National Debt

            All the money borrowed by the public sector over the past, which has not been repaid is called

            public sector debt