Economic practice revealed in the 19th century and confirmed in the 20th century that there are situations (the so-called "fiasco" of the market) when market coordination does not ensure efficient use of resources. Usually, there are four types of inefficient situations that indicate market failures (“fiasco”):
1) the existence of monopolies. Since the monopolies, striving for maximum profit, do not bring output to the volume that is optimal from the point of view of society, the government creates antimonopoly legislation prohibiting the monopolization of industry sales, divides the monopolist into several competing enterprises, and regulates the activities of natural monopolies;
2) the presence of imperfect (asymmetric) information. The constant updating of the product range under the influence of changing needs and the complication of products as a result of the implementation of the achievements of scientific and technical progress is accompanied by untimely informing consumers about the quality of the goods. Due to the lack of information, many consumers are suspicious of new brands and variety of products. To eliminate the asymmetry of information, the state creates special organizations that conduct examinations of the quality of goods and services, issue certificates confirming the safety of goods for the consumer, establish state standards for manufactured products and warranty periods for products, etc .;
3) formation of external effects. In the production and consumption of certain economic goods, direct, not directly mediated by the market, favorable and unfavorable effects of one economic entity on the performance of another entity often occur;
4) creation of public goods. The market does not provide for the production of public goods (fire safety, national defense, etc.), which, although they bring satisfaction to consumers, cannot be clearly separated, valued and sold to each consumer.
External effects (externalities) are the costs or benefits of market transactions that are not reflected in prices. They are called external, since they concern not only the economic agents participating in this operation, but also third parties. Externalities are divided into positive and negative effects arising from both the production and consumption of goods and services. A positive externality occurs when the consumption or production of one entity leads to an increase in the utility (profit) of other entities. For example, vaccinating students and students against the flu leads to a decrease in the number of people who get the flu. A negative externality is formed if the activity of one economic entity causes costs for others. For example, a petrochemical plant discharges polluted water into a river and poisons fish caught by a fishing gang. Since the plant does not purify the water, its private marginal cost is lower than the marginal social cost (Figure 4.1). This leads to the fact that the amount of output by the firm exceeds the socially effective output. The area of the triangle shows the net loss to society due to the production of more than
There are five main ways to manage negative externalities.
The first way is a ban on the production (consumption) of certain goods .
Second way -implementation of anti-advertising (warning labels on cigarette packaging).
Rice. 4.1 - Negative externality
Third way - introduction of taxes on the production (consumption) of goods. The imposition of a tax (T) shifts the curve into position and turns externalities into internals and the market equilibrium into an efficient one.
The American economist A. Pigou proposed to establish a tax on each unit of output produced by an enterprise ( Pigou tax) . Consider the following example. Suppose a firm produces a product X under perfect competition and is in equilibrium MR=MC) (Fig. 4.2). Her marginal cost MS at optimal output do not include the costs of neutralizing the negative externality. After establishing a tax per unit of output, the private marginal cost curve MS shifts to the left to
The new equilibrium is observed at the point where two curves intersect: the marginal social cost curve including private and external marginal costs, and the new private marginal cost curve. Thus, the Pigou tax will force the enterprise to take into account external costs and thereby contribute to the achievement of a socially optimal level of production. In order for this tax to fully compensate for the negative consequences for society, its value t must be equal to the external marginal cost at socially optimal output.
Rice. 4.2 - Pigou tax
Fourth way- creation of a market for external products through the consolidation of ownership of the right to produce external effects. In order for the externality market to work properly, two conditions are necessary:
first, the affected entity must have ownership of the use of the resource that the firm needs to produce the "harmful" good. Only in this case he will be able to interfere with the production and demand compensation for the damage caused. For example, the construction of a new road in the city requires the destruction of houses located on the path of the highway. The easiest way to solve the problem is to provide residents with apartments in the same area that do not worsen their situation;
secondly, the costs of negotiating compensation between the firm and affected entities should not be too high. If the deadlines for the construction of the road are tight, then it is almost impossible to meet the needs of residents in the absence of housing in the area. In this case, the transaction costs are too high, and Coase theorem(regulation of negative externalities without state intervention in the form of compensation by the source of negative externalities to the affected party) does not work.
Let us consider ways to neutralize the negative effect in situations where the property rights to the objects that generate them are assigned first to the petrochemical plant, and then to the fishing artel. Let us assume that the mill agreed to reduce output c to the socially optimal output, receiving an amount of money that can compensate for the losses caused by the reduction in output (Fig. 4.3). The distance between and at characterizes the maximum amount of payments by the fishery to the combine in exchange for its refusal to produce the corresponding unit of production.
However, the fishing artel insists on reducing output to and is ready to pay the plant for each additional unit of output not produced an amount equal to the distance AB. The transaction will not take place due to the fact that each additional unit of production brings to the plant at release an amount equal to the difference between the market price of the product and private marginal costs (segment CB). It could happen if the amount of compensation suited both parties.
Rice. 4.3 - Coase theorem
The above example shows the applicability of the Coase theory in the opposite direction, when the ownership of the lake belongs to the fishing artel. In this case, the subject of the agreements will be the size of the plant's payments to the fishery for pollution of the reservoir with production waste. The fishing artel will agree to pollution only if the combine's payments are higher than the marginal cost (for the fishery) of catching fish in the conditions of pollution. The mill will agree to pay for a chemical waste release permit if the payment is lower than the excess of the marginal revenue of each additional unit of output over its associated marginal cost ( R - MS). Despite the transfer of ownership of the reservoir, the plant will also reach a socially optimal output. An analysis of the practice of using the Coase theorem showed its applicability in cases where a small number of participants are involved in the agreements and the source of negative externalities can be identified.
Fifth way - externalization internalization, i.e., the transformation of external costs (neutralized at the expense of state or other third-party funds) into private ones, not including the costs of neutralizing the external effect. Suppose that after the increase in the discharge of waste into the river, the fishing artel is forced to fish in more remote places and its costs increase. In order to reduce the cost of producing their products, the plant and the fishing artel decide to unite. Before the merger, the plant produced, and after the merger -. On fig. Figure 4.3 shows that the internalization of the externality led to a reduction in output and the magnitude of the negative externality. When an external effect affects the well-being of not one, but many subjects, then the problem of external effects turns into the problem of the production of public goods.
public goods are goods that cannot be produced in sufficient quantities by private firms and have two properties:
- non-excludability, i.e. the impossibility of depriving any individual of the opportunity to use this good, even at his own request. This implies the property of the indivisibility of the public good: the subject cannot himself choose the volume of consumption of the good;
- non-competitiveness. With an increase in the number of consumers of a good, the level of consumption of each of them will not decrease.
The most important characteristic of public goods is the territorial boundary of their consumption. From the point of view of differentiation of the boundaries of consumption, the following public goods are distinguished:
international (combating air pollution and the expansion of the ozone hole, standards that reduce transaction costs, international stability, etc.);
Nationwide (defense of the country, protection of public order, activities of the federal executive, legislative and judicial authorities, etc.);
Local (street lighting, greening of squares, maintenance of parks, etc.)
There are very few pure public goods. In most cases, public goods are mixed, having features of both public and private goods. For example, emergency medical services are provided free of charge to the entire population, but if an ambulance went to one patient, then it cannot come to another (the non-excludability property does not work).
Optimal output of public goods- this is the volume at which equality of supply and demand is achieved (Fig. 4.4).
The role of the public goods supply curve is played by marginal social cost curve, consisting of the marginal private cost of the producer and the positive and negative externalities of production.
Demand curve for a public good has a negative slope, but is determined by adding individual demand curves not horizontally, as for a private good, but vertically.
Suppose there are two people in a society who live in the same house. Public benefit - cleaning the stairs. On fig. 4.4 shows the individual demand curves of two consumers and The abscissa shows the number of cleanings, and the ordinate shows the possible costs of paying for each cleaning of the stairs. The first individual is ready to pay 30 rubles for one cleaning per month, and 50 rubles for two cleanings, since the second cleaning, according to his demand curve, has a price equal to 20. The second individual is ready to pay 20 rubles for one cleaning, and 20 rubles for two - 30 rubles. (). Both are not ready to pay for the third cleaning. We sum up the expenses of two entities for the first cleaning and get an amount equal to 50 rubles. Since the total cleaning costs are 80 rubles, the total price of the second cleaning is 30 rubles. (). The corresponding points (1 cleaning - 50) and (2 cleaning - 30) lie on the total demand curve for a public good
"Failures" of the market are cases when the market fails to ensure the efficient use of resources. Usually, four types of inefficient situations are distinguished, indicating "failures" of the market:
a monopoly
imperfect (asymmetric) information;
External effects
production of public goods.
1. The presence of monopolies,
first of all, natural monopolies, as well as oligopolies in certain sectors of the economy, leading to a lack of competition among producers and damaging public welfare and consumers.
This necessitates:
State intervention in the form of the creation of state and municipal enterprises in industries with a natural monopoly and oligopoly,
State regulation and control of prices, production volume and quality of relevant economic benefits.
Because monopoly leads to suboptimal use of resources, government intervention can lead to significant improvements. In many cases, this is achieved through legal regulation alone. They facilitate the free entry of competitors into the market or even provide for the separation of monopoly firms. In such cases, the role of the public sector is reduced to the activities of legislative and law enforcement agencies.
The situation is more complicated in a situation of natural monopoly. An example is city water supply. Bringing the communications of several competing water companies to houses and apartments would mean increasing costs to an incomparably greater extent than the beneficial effect. Dividing a water company into a number of independent divisions usually doesn't make sense either. It will not provide competition, since each of the divisions will be a monopolist in one of the districts of the city. At the same time, the costs of operating the water pipeline, in particular the management, are likely to increase.
2. Another type of market failure is information asymmetry among producers (sellers) and consumers (buyers) of economic goods.
3. External and internal effects
3.1. externalities, or externalities - costs (negative externalities) or benefits (positive externalities) attributable to persons not participating in a particular market transaction.
If someone exploits limited resources without compensating for their full cost, the costs are borne by the rest of the participants in economic life. In this case, there is a negative externality.
For example, when an enterprise uses river water for free, polluting it, and those who live downstream are forced to invest in the construction of treatment facilities.
However, positive externalities are not uncommon. If, for example, a farmer built a road connecting his farm to a highway at his own expense, and residents of a neighboring village travel free of charge along this road, a positive externality arises.
Problems related to externalities can be solved on the basis of an adequate establishment of the rights and responsibilities of the Participants in economic activity. In practice, this is usually achieved through the legislative and regulatory activities of the state. However, in many cases it is more expedient to spend state resources not on creating cumbersome control mechanisms, but on the direct performance of functions that generate positive externalities, or on the formation of tax regulators for activities accompanied by negative externalities.
At the same time, the choice of the optimal form of intervention is determined by the specifics of a particular situation and practical expediency. In the public sector, as well as in a private enterprise, it is necessary to carefully compare different options for solving a problem, striving to achieve the desired result at the lowest cost.
In the case of negative externalities, such as environmental pollution, the state introduces appropriate environmental taxes that stimulate the introduction of wastewater treatment plants and environmentally friendly technologies by manufacturers. In the presence of positive external effects (in education, culture, healthcare), the state allocates subsidies to producers of relevant economic goods (services) to expand their production and increase accessibility for consumers.
3.2. internal effects, or internals, which are costs or benefits received by one of the parties to a market transaction due to the vagueness of the wording of contracts, which can bring undeserved benefits to one of the parties to the transaction, and cause economic damage to the other party. This type of market failure also requires state intervention to balance the interests of the parties in the conclusion and execution of contracts, which is the basis of contract law.
4. Public goods are a set of goods and services that are provided to the population free of charge, at the expense of state financial resources.
The production and distribution of public goods is one of the main functions of the state, its primary tasks. Here, the orientation of the state to reflect and realize the interests of the entire population of the country is manifested.
The form in which the state today assumes responsibility for public goods took shape only in the 20th century. Today, the normal functioning of the national economy cannot be imagined without such generally accepted benefits as a free healthcare system, education, external and internal security of the state, social security and insurance. The work of civil defense services and the elimination of emergency situations are also public goods. The significance of public goods lies in the fact that they are needed not by a part, but by the entire population.
Regarding the mechanism of production and distribution of public goods, the laws of the national economy are powerless - they are not able to work effectively in this area of the market. Therefore, objectively, this task is assumed by the state - the state apparatus.
Public goods are a type of economic goods that have properties opposite to private economic goods (market goods and services). Exist:
Net public goods that the market does not produce at all (national defense),
Mixed public goods (club, socially significant and quasi-public goods) that the market can produce, but in insufficient quantities. The source of their production can be civil society (club goods (telephone communication, pay TV, swimming pool)), municipality or the state on a certain scale (socially significant goods, quasi-public goods in natural monopoly industries).
Market failures or market fiasco – English Market Failure, is a situation that arises when the resources available in the market are allocated inefficiently. This situation in the economy can take many forms and appear in many situations, and it is often perceived as something that needs to be corrected through government intervention. For example, when the fishing industry experiences a market fiasco, the government is expected to make a number of policy decisions to address the problem.
When market failures occur, it means that the system is not Pareto efficient ( English Pareto Efficient). In turn, Pareto efficiency refers to a situation in which any improvement in one area would cause a corresponding loss in another area. For example, if a furniture manufacturer lowers the price of his products, which benefits consumers, he will lose part of the profit, that is, he will receive a loss equal to the benefit to consumers. On the other hand, a furniture manufacturer may reduce the purchase prices of raw materials to reduce costs and compensate for damage, however, this will lead to damage to raw material suppliers. That is, when a system achieves Pareto efficiency, it means that it works at an optimal level, maintaining the balance of all its elements.
There are many factors that can contribute to market failures. One of the most common reasons is monopolies, as there is no competition for certain goods or services in such a market. External influences can also be a problem that contributes to market failure, as the final cost of goods and services may not take into account the impact of external factors such as wages or environmental impacts. Some public goods are also seen as a form of market failure.
Social inequality in society can also lead to a market failure, as well as many other factors. In all cases, market failure is characterized by the fact that there is a better and more efficient way to allocate resources, but it is not used. Public goods are often used as an example of a market failure. For example, people might argue that private firefighting firms could be more efficient than similar government-funded services.
The state can provide various interventions to solve the problem of market failure, for example, by changing legislation, monetary policy, minimum wages and taxation. One problem with government intervention is that it can exacerbate market failures by failing to allocate and allocate resources efficiently. Deciding when and how to intervene is a difficult decision that can be complicated by political and social issues affecting the people and institutions involved in decision making.
” does not work (for example, environmental pollution, soil restoration after mining). Thus, “failures” (fiasco) usually imply the need for administrative regulation of the economy and economic relations in order to smooth out or eliminate the negative consequences of the market mechanism.
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Definition
Market fiasco- equilibrium in the market, in which the rational behavior of economic agents does not ensure the achievement of Pareto - efficient allocation of resources, being a failure of the market coordination mechanism; inefficient market allocation of resources, in which the condition is violated completeness of the market, the behavior of consumers and producers is not competitive or there is no market equilibrium.
Classification of market failures
- imperfect competition (including monopoly, monopsony and oligopoly);
- lack and asymmetry of information;
Under monopoly, monopsony and oligopoly, equilibrium is established when marginal revenue and marginal cost are equal, and the price exceeds the value of marginal revenue and marginal cost, that is, other things being equal, the price is higher than under perfect competition, and the volume of output is less than under perfect competition, there is a net social loss.
With information asymmetry, the consumer cannot influence the manufacturer, there is no control over the quality of services provided, there is no accurate assessment of the quality of services, and the seller obviously knows better the quality characteristics of his products. The lack of information breeds inefficiency, blocking the interaction between the participants in the transaction, there is a net social loss.
In the presence of external effects, part of the benefits or costs received from any activity or factor of production goes to outsiders, which affects the utility functions of individuals and the production functions of enterprises, there are net social losses.
Bator F.M. generates five kinds of dips when Pareto efficiency is violated at laissez-faire :
- failure of existence, absence of constants of equality of marginal norms of substitution between production and distribution;
- signal failure, the absence of a local maximum profit for each producer or a general maximum profit for each producer;
- incentive failure, no non-negative returns for all producers;
- the failure of the structure, the violation of perfect competition, in which a few firms of effective scale, having established a maximum welfare in the distribution of resources, cannot self-sustain output and prices;
- failure of enforcement, the existence of legal and organizational imperfections, restrictions on the accounting of resources and products, preventing placement on the market.
Causes
The sources of market failures are:
- the extinction of competition due to mergers, collusion and cutthroat competition, forming only a small number of firms;
- the development of technological progress, requiring the use of more real capital, large and centralized markets, rich sources of raw materials, forming large-scale producers;
- the inability of the market system to redistribute resources according to the needs of consumers, hence wasteful and inefficient production and unequal distribution of income;
- the inability of the market system to take into account all the benefits and costs associated with the production and consumption of certain goods and services, when supply and demand do not reflect all the benefits and costs of production;
- the existence of needs for goods and services, the production of which cannot be financed by individuals through the market, when social or collective needs are not taken into account;
- the instability of the mechanism of full employment and the stability of the price level.
Thus, the factors hindering the efficiency of resource allocation under perfect competition are:
- lack of a mechanism for optimal distribution of income;
- the absence of side costs and benefits, the production of public goods;
- the emergence of obstacles to the application of better technology, the development of new production equipment and slowdowns in the pace of technical progress;
- lack of product differentiation and lack of conditions for creating new products.
Solving the Market Fiasco
Ensuring market completeness overcomes the market fiasco through: taxes and subsidies according to Pigou, through the redistribution of property rights according to Coase and the adoption of special pricing rules. These tools create new markets (quasi-markets) and, if the property of convexity of the set of production possibilities is preserved, make it possible to achieve an efficient distribution of resources.
To overcome market failure associated with the lack of competitive behavior, non-market solutions are used according to the theory of implementation (the theory of the incentive mechanism), which requires direct state regulation.
To overcome market failure associated with the lack of completeness of information and asymmetry of information, it is proposed to create a market for contingent liabilities, a futures market.
State intervention copes with the problem of the market fiasco:
In conditions situational monopoly(factors of production are not available to competitors) the state can share the concentrated production capacities of the monopolist on the basis of antitrust laws, and prevent mergers.
At asymmetries and incompleteness of information the state distributes risks among consumers, insuring investments and deposits, controls the production and sale of goods and services, itself participates in the production of certain goods and services, and finances ultra-long-term projects.
At negative externalities(part of the costs associated with an activity or factor of production goes to third parties) the state internalizes external effects, prohibits and introduces a system of fines and punishments. With positive externalities (part of the benefits associated with an activity or factor of production goes to third parties for free), the state introduces a system of incentives and subsidies, other state support for the additional production of public goods.
see also
- Market “lemons”: uncertainty quality and market mechanism
Notes
- Yakobson L.I., Kolosnitsyna M.G. Economics public sector. - M. : Yurayt, 2014. - S. 15. - ISBN 978-5-9916-2581-4.
- Mill J. Fundamentals of political economy. V 3-x t. . - M. : Progress, 1980.
- Blaug M. Economic thought in retrospect. - M.: Delo, 1994. - S. 196, 549. -
Market failures are formed due to the imperfection of market institutions and instruments. At the same time, one of the main points is that a perfect market economy is not able to solve socio-economic issues that are very important for society. That is, a market that works autonomously will simply not take care of ordinary citizens, since it will not have an incentive to do so.
government intervention
This is where government intervention is needed. If trade relations do not allow the rational distribution of funds among citizens, it is necessary to create conditions for this. For example, free education. If the market exists autonomously, people can not be provided with knowledge, since it is not profitable to train everyone at once. It is better to teach literacy only to those who have money.
It can be concluded that market failures are a kind of obstacles that do not allow society to achieve efficiency. As a rule, there are four main and several additional failures. These are externalities, public goods, monopoly, and asymmetric information.
Major market failures
Externalities are anything that is not directly related to the economy. The most striking example is the chemical pollution of water bodies. If the state had not created laws to protect the environment, entrepreneurs could have destroyed entire flora and fauna long ago. There is no point in building purification facilities, spending money, if everything can be done like that. Environmental laws establish certain standards, the excess of which threatens with a huge fine.
Public goods are everything that society needs, but is not someone's private property. For example, roads. People need conditions for transportation. If the market ruled everything, good roads would only be on the way to the enterprise, and devastation would reign in the rest of the places. The same goes for education, medicine, police, and more.
Monopolies pose a threat to much of society. Imagine that you can only buy bread from one person. At the same time, he can dispose of its price and quality as he wants. For example, put a price of 1000 rubles. for a roll, and make the quality terrible. Even if you wanted to buy other bread, you simply would not succeed. The state prohibits the operation of such enterprises.
The last point is the asymmetry of information. In simple terms, these are conditions in which the seller knows more about the product than the buyer. As a result, there is a negative trend. For example, a customer may buy a very low-quality product because they do not know the exact characteristics. The state develops GOSTs and forces manufacturers to indicate all the necessary information.
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