Market Failure

Market is often known as physical places, such as supermarket or shopping mall (TheFreeDictionary,1963). Market is a place for buyers (who determined the demand of products) and sellers (who determined the supply of goods) to trade goods and services. It is also a place for operation the forces of demand and supply(BusinessDictionary.com,1910). According to market structure, there is various types of market such as perfect competition market, monopoly market, oligopoly market and so forth (Michael Quayle,Timothy Robinson,William McEachern,1994). Market has two categories, which is perfect competition market and imperfect competition market. Imperfect competition market includes monopolistic competition, oligopoly, duopoly and monopoly. The sizes of these markets are in ascending order, which means the number of firms of the perfect competition is the most and the monopoly is the least (R.Schiler,1943).

As we know the resources is scarce and so the market need a mechanism to allocate the resources. Different economy system have different mechanism to allocate the resources. For example, price mechanism is used in the free economic system. Consumers can influence allocation of resources in free economic system. Producers' decision (what goods and how many to produce) is depend on consumers' spending. This can be done by the invisible hand (price mechanism). For instance, if consumers decide to buy few apples, which means demand falls and the prices will fall. Therefore, suppliers will allocate less resources to the apples production because of the reduced profits. In contrast, if consumers decide to buy more oranges, suppliers will allocate more resources to growing of oranges to increase supply because prices of oranges will rise as the demand increase and suppliers will get more profit. Therefore, the consumers' spending will affect the decision of suppliers. Suppliers' main purpose is profit. So, they will not produce goods which consumers do not want(Oocities.org,1965).

The breakdown of price mechanism will cause resources allocate inefficiently and lead to market failures. Public goods is one of the market failures. Public goods which is often services are provided by government(BusinessDictionary.com n.d.). Public good has free-rider problem because of the two characteristics of it which is non-excludable and non-rivalry in consumption. Non-excludability means the services are not just for those who pay for it so everyone can enjoy its benefits. Non-rivalry means the availability of a good will not be reduced. That means consumers can consume the services without paying for it and no one ask them to pay. Therefore, no private sector producers will supply this kind of goods as they will not get profit from it. Examples of public goods are street light and national defence(Tutor2u.net,n.d.).

Market power is another market failures and can be defined