Market Failure

Topics: EconomicsFinance


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Last updated: April 20, 2019

This essay aims to give reasons why markets fail in various illustrations like Healthcare, Education and Housing and how governments could intervene to reduce this occurrence and failure. Market failure relates to a condition, in which a market does not efficiently allocate resources to achieve the greatest possible consumer satisfaction. Certain ignorance exists in all markets causing prices and supplies to differ from what they would be the consumer had the complete information.These disparities can be very large, such as paying too much for something, or having to sell something for much less than the original price and therefore making a huge loss.

Another important cause of market failure lies in the destabilizing effect of “perverse” expectations, which means, demand going up and supply going down, creating skyrocket market prices. The four main market failures are public goods, market control, externality, and imperfect information. (Robert Heilbroner and Lester Thurow 1994:184-85).Market failures in health care relates with issues such as the rise of an ageing population, which have increased healthcare spending. In addition to the rapid rises in healthcare prices, this have led for a need for healthcare reform; health is an essential element in peoples well-being, therefore an average persons ill health is often irregular and the causes varied. Demand for health insurance has shot up due to increased demand for healthcare, although what supplied equates only to healthcare expenditure insurance.

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Sara Connolly and Alistair Munro 1999:360-361) One of the characteristics of healthcare is that the demand for it is expected to happen unexpectedly. Generally, people are unable to foretell when they are likely to need health treatment; also, it is going to be a challenge for them to make plans, to ensure that they could always meet any unexpected medical expenses. The imbalance in information between demand and suppliers may result in higher prices for medical care; overprovision and an importance on modern medicine could push prices up even further.Direct provision may counteract these tendencies, for the government to provide health care for the majority of the population would mean the government becoming the dominant buyer of doctor’s services. For many commodities, consumers have a fair idea of what quality is about.

The situation for healthcare is very different; the consumer usually has very little idea of the extent of their illnesses, and of the suitability of various possible treatments.Consumers usually are unable to get the level of medical information necessary to form an opinion of the competence of a professional doctor, and of the hospital services; also obtaining this information would prove potential expensive. The end-result of this is with the government assuming the position of a guardian of the consumer’s interests and assuming responsibility, for guaranteeing that standards meet an acceptable level.Faced with this uncertainty as well as its limitations, it is not very surprising to find that in almost every country worldwide, governments intervene in the healthcare market; the type of intervention varies greatly. The types of government intervention policies found in healthcare come into three key groups: regulation, direct provision, and taxes/subsidies. Under the National Health Service, all three are used. Each can be seen as a response to the various failures of the market.The most regulatory policy is designed to ensure that the quality of health care meets acceptable standards.

Often the government lacks the specialised information necessary to carry out these functions effectively and so the responsibility for regulation is delegated to professional bodies within the health service itself. In Britain, governments own the majority of the hospitals through the National Health Service (NHS). The government funds hospitals and general practitioners and the services are mainly offered free at the point of use.

Since they do not incur user charges, patients are subsidised. Over the last decade, the services and level of subsidisation has been progressively reduced, but nonetheless, over eighty-five percent of total health care spending is still financed from taxation. Health care has certain characteristics, which in general mean that it will not be allocated efficiently by a market system; these include uncertainty of demand, imperfect consumer information leading to monopoly and externalities. (Julian Le Grand, Carol Propper and Ray Robinson 1992:42-47,49-55, 62-63).

There are various potential causes of market failure in education, resulting in suboptimal consumption; education and training present external benefits. Imperfections in the capital market make it harder to get access to finance investment in education. Evidence suggests that government intervention is necessary on the justification of vertical or horizontal equity. For example, government provision of education or regulation, in a minimum school-leaving age, could be one way of redistributing income from the rich to the poor.It may also help to improve equality of opportunity across the population. Mainly when there are social benefits in the educational system, this creates positive externalities and consequently, the market leads to underinvestment. Government action may be justified to internalise the externalities, which means improving the incentives, in Investment, Education, and Training. It is certainly true that compulsory schooling helps young people to enter more effectively in the labour market.

Additionally, any child’s intellectual development is greatly influenced by their parent’s education.It has been found that education is a worthwhile cause that benefits people, but this is only one reason for market failure. Other factors to consider include imperfect capital markets and uncertainty. Much of education policy has been about quality and equality. The increasing amounts of university students have bought about a crisis in student finance. The challenges that individuals face in financing their education caused by imperfect capital markets has resulted in government involvement. (Sara Connolly and Alistair Munro 1999:386,390,391,407,408).

HOUSING: A succession of British governments, over the decades endeavoured to make a respectable home available for every family at a price that is affordable. On this subject of affordability, increasing house prices during the 1980s, when there was an increase in real terms of over 90 per cent between 1982 and 1989, placed home ownership beyond the earnings of many households. For much of this century, the overall shortage of dwellings in relation to the number of households seeking accommodation has resulted in dominant housing concern.Hence, successive governments have set building objectives and judged their performance in terms of the number of dwellings constructed each year. During the 1980s, however, the government’s housing targets have tended to emphasise efficiency considerations, rather more than moving rents towards market price levels, which has been justified in terms of providing incentives for both consumers and producers, to make better use of housing resources. Housing clearly is an expensive commodity; average house prices are typically between three and four times the average income.This means a small amount of people are in a position to purchase a property outright.

However, the majority, are either renting or borrowing to enable them to buy a house. To meet this demand, numerous institutions and Building Societies over the years, have improved their services to specialise in long-term mortgage loans to house buyers. Another feature that distinguishes these societies from many other financial institutions is that they borrow short-term and lend long-term, the reverse of normal practices. Well-informed consumers are important if a market is to operate efficiently.

If consumers do not possess adequate information on the goods and prices available elsewhere in the market, some sellers could charge excessive prices and make abnormal profits. Unfortunately, imperfect information is widespread throughout the housing market; both renters and owner-occupiers are affected. Imperfect information can also create more serious concerns for renters, especially if they have low incomes. When a market system allocates housing resources, there is little or no confidence in the behaviour of the individuals housed, knowing the likelihood of existing externalities.This may result in widespread external costs or inefficiency. Externalities play a very important role in the development, spread of slum housings, and show how they can feature significantly in the improvement of such areas.

Most of the housing will be sub-standard, with low-income families living at high densities in over crowded buildings, which are at times, not fit to occupy and are subject to anti social behaviour. Often the housing problems arise because families have low incomes to buy or rent decent housing.There are other imperfections in the housing market, which prevents it from functioning efficiently. Inadequate incomes lead to inequity, whereas imperfections result in inefficiency. The distinction between these two explanations is of some importance for housing policy.

The view that housing problems arise because some families have inadequate incomes, suggests the problems could be tackled most effectively by supplementing the purchasing power of these families. According to this Market-Imperfections view, no other specific intervention in the housing market is required.The Market-Imperfections view, alternatively, suggests that specific polices aimed at removing the imperfections will be necessary. (Julian Le Grand and Carol Propper 1992:91-98,106). The above examples show that there must be imperfect information if the markets are to operate efficiently.

Markets must be complete meaning that all goods must be provided for everyone, without government intervention in healthcare the system would be more efficient to the rich instead of for the overall society, this is also possible in education and housing, in which there could be major disparities between choice amongst the rich and poor.

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