Market imperfections

• What can cause partial market failure?

  Information gaps exist in nearly all free markets and distort market outcomes, resulting in partial market failure
• What is one assumption in a free market?

  • One of the underlying assumptions of a free market is that there is perfect information in the market
  • Buyers and sellers have the same level of information about the good/service. This is called symmetric information
• What is asymmetric information?

  Not all parties have the same amount of information in a transaction
• What is imperfect/incomplete information?

  • Imperfect information refers to a situation when buyers and/or sellers have inaccurate information or do not have all the information necessary to make an informed decision
  • This distorts socially optimal prices and quantities in markets, resulting in over- or under-provision of goods and services and market failure
  • Sellers may be aware of product defects which are not communicated to buyers
• What is market power?

  • Market power refers to the ability of a firm to influence and control the conditions in a specific market, allowing them to have a significant impact on price, output, and other market variables 
• What is a pure monopoly?

  • A pure monopoly exists when there is only one producer in the market. A firm with monopoly power controls over 25% of the market share (in the UK) and, as such can act as a pure monopoly
• How can monopolies result in market failure?

  • Monopoly markets are characterised by high barriers to entry making it difficult for other firms to join the market
  • There's no incentive for a monopoly power to be economically efficient which leads to higher prices + reduces consumer welfare
  • Markets are not allocatively efficient and a misallocation of scarce resources results in market failure
  • In a monopoly market, consumers pay a higher price and firms produce lower output than under firms in perfect competition
  • Scarce resources are not allocated efficiently, resulting in a market failure
• What does the mobility of the factors of production mean?

  • refers to how easily firms can switch between different factors of production
  • The more mobile the factors, the more flexibility there will be in production
  • E.g. If a firm can produce both cars and trucks on its production line, and switching from one to the other only requires a few simple changes to some robotic arm extensions, then its capital is very mobile
  • This means that the firm can be very responsive to changes in demand for cars and trucks and is likely to make more profit
• How does factor immobility occur?

  • Factor immobility occurs because of difficulties in reallocating factors of production to alternative uses
  • If factors are immobile, then markets will find it difficult to clear when there is a change in supply and demand
  • E.g If demand increases but supply is fixed due to immobile factors of production, it will take time for a new market equilibrium to be reached
  • This can result in the misallocation of resources, leading to market failure
• Why is land immobile?

  • Land is generally immobile due to climate conditions
  • E.g It is not possible to grow certain crops in some climates
• How is capital both mobile and immobile?

  • Capital can be both mobile and immobile
  • Technology (machinery) can become obsolete
  • As industries change, so does the type of capital equipment needed
  • E.g. The UK is less likely to use specialist coal mining equipment now and it is difficult to put this equipment to use elsewhere
• How is enterprise mobile?

  • Enterprise is generally very mobile, as the skills involved can be applied in every industry. Someone who has borne risks and organised factors of production in the car industry should be able replicate this in the retail industry too
• What is immobility of labour?

  Immobility of labour may lead to a misallocation of resources and market failure because of a change in the pattern of demand results in structural unemployment 
• What is geographical immobility?

  • Geographical immobility occurs when workers find it difficult to move from one area to another
  • Variations in regional house prices and the cost of living
  • Family and social ties to an area
  • Financial costs
  • Imperfect information
• What is occupational immobility?

  • Occupational immobility occurs when workers cannot easily move between job sector. This can depend on
  • Level of education and skills
  • Specific qualifications required
  • Insufficient work experience