Answer to Question #152916 in Microeconomics for RAZA

Question

explain in what circumstances a perfectly competitive market will fail to allocate sufficient resources to the production of product

Answer 1

ANSWER

Free market failure is a state in which the allocation of products or services is not Pareto efficient.

The cases when the free market fails to achieve an efficient allocation of its resources can be divided into four groups. 

The first group: some workers, customers or business entities can receive the market power in the free or perfect competitive market

Workers, customers and producers in a market can receive market power. This power can allow to loss some mutually beneficial gains from activity. This, in turn, can cause the inefficiency due to imperfect competition that can be represented by oligopolies or monopolies.

Public loss is a function of bad behaviour of some companies

The second group named “Negative externalities”

Gains or losses consistent with some product or service differ from the company's cost written in its financial statement. These gains and looses are public. 

The example of the inefficiency associated with externalities is the environmental harm that is depended on pollution or overexploitation of land resources. Some company, for example, can harm the river. The water from this river is raw for people and other companies. Hence, water cleaning expenditures are other people and entities expenditures.

Public loss is caused by the monopolies or oligopolies

The third group named “Non-excludability goods”

Some markets can fail due to the goods' features. It can lead to resource depletion in the case of common-pool resources, where the use of the resource is rival but non-excludable, there is no incentive for users (buyers for free prices) to conserve the resource. 

An example of this can be a lake with some supply of fish. People catch the fish faster than the fish can reproduce. As result the amount of fishes will dwindle and other people will not be able to receive this product.

Public loss is caused by people's assumption  regarding some free or natural resources

The fourth group named “Differentiation impossibility”

Product differentiation is impossible according to the one of the perfect market conditions (this condition is the following: goods are perfect substitutes for each other). Hence, to society as a whole benefits immeasurably from a different products’ properties available in some market. 

Public loss is caused by the case that some products can not differs from each others