Why Do Markets Fail?

2187 Words Nov 4th, 2015 9 Pages
Why do markets fail?
There are a number of reasons as to why markets fail and there are five different types of markets that this can be brought down to. These include: Monopoly, Collusion, Asymmetric information, Externalities and Public good and the free rider problem.
A monopoly can be seen as a form of market failure and this is because unlike in perfect competition, firms with large market power have the ability to inflate their prices as they are usually the ‘price-makers’. The price at which something will be sold is usually determined by the interaction of the supply and demand within the market.
A monopoly can either set the selling price or quantities – but not both. The reason for this is because although they have
…show more content…
The profit maximising quantity can be found where MR and MC intersect and in order to find out what price the firm will sell their good / service at, you have you go up to the demand curve from the profit maximising quantity and this tells us what price consumers are willing to pay once you trace over from the demand curve to the price cost axis.
Now, in order to discover whether or not the firm makes any economic profit, you have to go follow the output line up until the ATC curve (Which is the per unit cost), and once again draw back to the price cost axis.

Asymmetric information
Asymmetric information is when one party has a superior knowledge of something compared to another party. An example of this is a seller and a buyer as the seller would be the party with a superior knowledge over the buyer. This could lead to market failure as the seller (Who has superior knowledge) to manipulate the situation and take advantage of the buyer (Inferior knowledge).
Asymmetric information can lead to two main issues, and they are: Adverse Selection - Hidden Information Moral Hazard – Hidden Action
To begin with there is adverse selection and this is form of market failure happens when products of a different quality are sold at a single price due to asymmetric which inevitably results