Essay: Market Failure the OECD

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Market Failure

The OECD defines market failure as a situation in which "market outcomes are not Pareto efficient." There are a number of causes of market failure, and some of these can be addressed by government intervention. Technically, a market is going to be inefficient unless a state of perfection competition exists. Thus, when one of the conditions of perfect competition is violated, market failure can be said to exist. Externalities, public goods and information problems can all be sources of market failure. These sources of failure are often addressed through government intervention.

One example of market failure not addressed in the readings is that derived from strategic needs. For example, the markets for some foods and some military goods are distorted. The demand for such goods is not rational, because the demand is not directly related to consumption. Governments are essentially creating this market failure in order to ensure that strategic resources are available should they be needed. The actual demand is not necessarily tied to this expected demand in any way -- for example of the tens of thousands of nuclear weapons ever built, only two were actually used. The demand is perceived rather than actual. This could be classed as a form of information deficiency, but this form exists even in markets with perfect competition.

Market power is another cause of market failure, as the power that a firm exerts distorts demand in the market, especially with respect to pricing. Pricing is an important element of market power, because all other things being equal lower prices create a positive feedback loop whereby the firm with lower prices increases its market share allowing it to lower prices further. Eventually, the… [END OF PREVIEW]

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