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Market Failure and Economic Regulation

Market Failure and Economic Regulation. Market Failure. Market failure  is a concept within economic theory describing when the allocation of goods and services by a free market is not efficient. 

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Market Failure and Economic Regulation

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  1. Market FailureandEconomic Regulation

  2. Market Failure Market failure is a concept within economic theory describing when the allocation of goods and services by a free market is not efficient.  Market failures are often associated with information asymmetries, non-competitive markets, externalities, or public goods.

  3. Factors responsible for Market Failure • The Nature of the Market • Monopolies(Pure and Natural) • Hypothetical Monopolies • Monopsonies, or  • Monopolistic competition

  4. Factors responsible for Market Failure • Externalities • where gains or losses associated with the product are borne by people who did not sell or purchase the product.  • The Nature of the Exchange • Markets may have significant transaction costs, agency problems, or informational asymmetry.

  5. Factors responsible for Market Failure • Bounded Rationality • most people are only partly rational, and are emotional/irrational in the remaining part of their actions • Property Rights as Rights of Control • the system of rights which defines that control is incomplete.

  6. Different Views • Public choice view - government should not always attempt to solve market failures • Austrian view -  there is no such phenomenon as "market failures" • Marxian view - high levels of inequality 

  7. Economic Regulation • Regulatory economics is the economics ofregulation, in the sense of the application of law by government that is used for various purposes, such as • centrally-planning an economy, • Remedying market failure, • Enriching well-connected firms, or • Benefiting politicians

  8. Regulation can have several elements: • Public laws, standards or statements of expectations. • A process of registration or licensing to approve and to permit the operation of a service, usually by a named organisation or person. • A process of inspection or other form of ensuring standard compliance, including reporting and management of non-compliance with these standards: where there is continued non-compliance, then: • A process of de-licensing whereby that organisation or person is judged to be operating unsafely, and is ordered to stop operating or suffer the penalty of acting unlawfully.

  9. The Worldwide Governance Indicators • The ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development • Voice & Accountability, • Political Stability and Lack of Violence,  • Government Effectiveness, • Regulatory Quality,  • Rule of Law, and • Control of Corruption

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