Market System

Market failures

Economists define Market Failure as a situation where resources cannot be efficiently allocated due to the breakdown of price mechanism caused by factors such as establishment of monopolies. The reasons why market failures occur are:

1. Agents in a market can gain market power, allowing them to block other mutually beneficial gains from trades from occurring.

2. The actions of agents can have externalities, which are innate to the methods of production, or other conditions important to the market.

3. Some markets can fail due to the nature of certain goods, or the nature of their exchange.

Government failures

This occurs when govt intervention to overcome market failure fails. Also govt intervention may make things worse. This can occur for the following reasons:

1. Poor Information, politicians may have poor information about the type of service to provide.

2. Political interference.

3. Admin cost of govt bureaucracy in running public services.

4. Lack of incentives: there is no profit motive working in the public sector this can lead to inefficiency.

Market system and Command economy (central planning economy)

The difference between these two central planning economies is one where the government makes decisions about what to produce, how to produce and who gets the final product. On the other hand, in a market economy, individuals own property and are free to trade such property and gain from trading property.

Fail of the communist system in Oriental Europe