Why Markets May Fail to Generate Socially Desirable Outcomes

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Discuss why markets may fail to generate socially desirable outcomes.

The term market refers to the group of consumers (households, firms or government) that is interested in product or service and has the resources to purchase that product. Acquiring the product and/or getting a service are always permitted by law and other regulations. The market definition begins with the total population and progressively narrows as show in the following diagram.

Market definition

Conceptual diagram

The size of the market is not fixed and depends on the product price. It is increasing while increasing the prices and decreasing while decreasing the prices. In addition, qualified markets can be increased through changes in legislation
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Interests of consumers and suppliers are harmonized - brought into equilibrium. In this model, prices are determined impersonally in the market and this secures the equality between those demanding the good and those supplying the good.

Neoclassical model examines the commodity prices influences by grouping them into two categories; side of supply (such as: right kind of labour, raw materials, machinery, power and the used technology) and side of demand (such as: influences affecting consumer demand e.g. income, lifestyle, age, and the social conventions and expectations)

Neoclassical model can reflect one of the causes to market failure; Asymmetric information. It represents the lack of relevant information. The people can not make maximizing decisions if they are poorly informed about the things they are buying or selling. Neoclassical model main weakness is that it models the competitive outcome, i.e. equilibrium, rather than the competitive process. In this point people will never have complete information when responding to economic changes.

F.A. Hayek is representing the third theoretical perspective of the competitive market. He admire the basic idea of the Neoclassical model (perfect competition) pointing out its main weakness; lack of emphasis on the process of competitive price information (Neoclassical emphasizing the equilibrium outcome different perspective than Hayek). Hayek theory
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