INTRODUCTION:

Market failure has become increasingly important topic.There is a clear economic case for government intervention in markets where some form of market failure is taking place. Government can justify this by saying that intervention is in public interest. Basically market failure occurs when markets do not bring about economic efficiency. Government intervention occurs when markets are not working optimally i.e. there is Pareto suboptimal allocation of resources in market/industry. In simple terms, Market may not always allocate scarce resources efficiently in a way that achieves the highest total social welfare.

SOCIAL EFFICIENCY: Social efficiency means when Marginal social cost (MSC) equals with Marginal social Benefit (MSB). That : But, Three situations a market can face: A. If, the Marginal Social Benefit (MSB) any given good or service exceeds the Marginal social cost (MSC) then it needs to produce more to meet the social efficiency. So, MSB>MSC Produce more MSC=MSB

B. If, the Marginal social cost is equal to Marginal social Benefit, the market is socially efficient So, MSB=MSC Keep the production at the current level.

EQUILIBRIUM OF THE MARKET: In the real world, it is very rare that market is socially efficient.so, Marginal Social benefit does not equal to Marginal social cost. This action has spill-over effect to the other people. This is called externalities. An economy where all markets are perfectly competitive and where there are no externalities will be socially efficient when there is a state of general equilibrium . (Sloman and Garratt 5th Edition).In any good market, the consumer achieve private efficiency where the Marginal benefit equals price and for producer ,the Marginal cost equals to price.so,all the consumers and producers has to face the same Market prce,in equilibrium Marginal Benefit equals to Marginal cost .

In absence of the externalities, benefits from the consumption are confined to consumer themselves. In other words, as members of society, their benefit is the whole social Benefit. Thus, P=MU=MSB,

Likewise, the cost of production are confined to the producers, there are no cost imposed on the other member of society. Thus, P=MC=MSC,

To summarise: MU=MSB=P=MC=MSC And hence: MSB=MSC

This equilibrium in any Market under perfect competition with no externalities is socially efficient. When this applies to all Market then general equilibrium will be socially efficient. REASONS FOR MARKET FAILURE: The general reasons for the Market failure are : A. Externalities B. Public Goods C. Monopoly Power A. Externalities: The Market will not lead to social efficiency if the action of producers or consumers affect people is known externalities. They are side effect are third party effect of production or consumption. Externalities can be either desirable or undesirable. If, that is desirable, people are affected beneficially: external benefits or positive externalities. If, that is undesirable, people are affected external cost or negative externalities. With externalities, the full social cost of production is the private cost faced by the firm plus externalities and the full social benefit from consumption is the private benefit enjoyed by consumers plus any externalities of consumption. CLASSIFICATION OF EXTERNALITIES:

There are four major type of externalities: 1. External cost in production(if MSC>MC) 2. External benefit in production(if MSC<MC) 3. External costs in Consumption(if MSB<MB) 4. External benefit in Consumption(if MSB>MB) 1.EXTERNAL COST OF PRODUCTION:(MSC>MC)

When the firm is bearing less cost rather than the costs borne by the society which is nothing but the Marginal social cost(MSC) of the firms production exceeds marginal private cost(MC).[MSC>MC]Now, we can assume that the organisation is a price-taker and on the other side,operating in a perfect market Q1 :MC=P. External costs lead other production from society point of view and other problem arises that there is no legal ownership of the air or river etc. In the free Market.Where Q2= (P (MSB)=MSC). 2. EXTERNAL BENEFIT OF PRODUCTION :( MSC<MC)

Here, the marginal private cost of production is greater than Marginal social cost.So,MC curve above the MSC curve. The level of output provided the company is Q1.Where P=MC,a lower level of social optimum Q2 , Where P=MSC. The benefit not only the company but also the society.
For example, If a company plants new woodland it benefits not onl y company but also the society due to a reduction of CO 2 in the atmosphere.

3.EXTERNAL COST IN CONSUMPTION(MSB<MB):

External costs of consumption (MSB<MB) is when the third party suffers from anothers consumption, for example when people suffer from exhaust, fumes or noise from people using their cars. These negative externalities make the marginal social benefit of people using their cars less than the marginal private benefit. The MSB curve is lower than the MB curve. Thus, MSB<MB Examples: The negative effects of a loud radio have in public places or the smoke from cigarettes and litter.

4.EXTERNAL BENEFIT IN CONSUMPTION:(MSB>MB)

When ,the person using the personal mode of travelling ,usually changes his mode by using with other option which will also gives some more protection and benefit to the general public. Ex: people travel by train rather than their own vehicle(e.g-car), which will benefit other public to face less accident on road and less pollution. Where, MSB >MB
For another example, When more people travel by train through congestion c harges being brought in from the Government other people benefit by there being less congestion and exhaust and fewer accidents would occur on roads, therefore Marginal social benefit of rail travel is greater than marginal private benefit to the rail passenger. There are external benefits outside the rail travel.

B.PUBLIC GOODS: A good or service that has a features of non-rivalry and non-excludability and as result would not be provided by the free market. (Sloman and Garatt.p-197) 1.Non-rivalry: The consumption of goods or service by one person willnot be affected by others from enjoying it (Sloman and Garatt.p-197) 2.Non-excludability: That means it is not possible to provide a good or service to one person without it thereby being available to others to enjoy. Examples:
Street lighting / Lighthouse Protection, Police services, Air defence systems, Roads / motorways, Terrestrial television, Flood defence systems, Public parks & beaches.

That s why Free rider problem arises. People often unwilling to pay for the things if they can make use things other people have purchased.This problem can lead to people not purchasing things that would be to the benefit of themselves and other member of society.

C.MONOPOLY:

When, the market is imperfect, then market is whether monopoly or some forms of imperfect competition. Under the monopoly market fails to equate MSB and MSC.Production is less than socially efficient output. For downturn sloping demand curve the marginal revenue is below the average revenue(=P =MSB).Profit is maximum at an output Q1.where marginal revenue equal marginal cost. If , There are no externalities ,the socially efficient output be the higher level of Q2.where MSB=MSC.

DEADWEIGHT LOSS UNDER MONOPOLY:

UNDER PERFECT COMPETETION: The industry will produce output of Q pc at price Ppc,where MC=P=(AR) at point a. Consumer surplus: The excess of what a person prepare to pay for good(i.e-utility)over what that person actually pays. Consumer total benefit is pointed out under demand curve(sum of all area 1+2+3+4+5+6+7).This demand curve shows how much last consumer is prepare to pay. The area under demand curve which shows the total of these marginal benefit from zero consumption to current level-it gives to the total benefit. Consumer total expenditure is Ppc xQpc (area 4+5+6+7). Consumer surplus: Difference between total benefit and total expenditure: in other words, the area between the price and demand curve (area 1+2+3)

PRODUCER SURPLUS: Difference between total revenue and total cost. Total cost is the area under MC curve (area 6+7).The area under MC curve thus gives all the marginal costs starting from an output of zero to the current output-it gives the total cost as the marginal cost shows what the last unit cost produce. Total revenue: is the PpcXQpc (area 4+5+6+7) Total producer surplus is the area between price and MC curve. (area 4+5) Total surplus:

Now, the total surplus is the consumer and producer surplus. The area between Demand and MC curve. Now, the Total surplus :( area 1+2+3+4+5)

THE EFFECT OF MONOPOLY ON TOTAL SURPLUS: The firm will produce where MC=MR,at an output of Qm and price of Pm For producer, Total revenue: Pm X Qm (area 2+4+6) Total cost: (area 6) Total producer surplus: (area 2+4) So,The producer surplus under perfect competition is smaller as area(4+5)<(area2+4).So,Monopoly profit are larger than perfect competition. For consumer: Total benefit: (area 1+2+4+6) Total expenditure: (area 2+4+6) So, The consumer surplus: (area 1) So, Total surplus under monopoly(area1+2+4) which is smaller surplus than under perfect competition.

Dead weight calculation: Perfect competition total surplus: (area 1+2+3+4+5) Under Monopoly total surplus Dead weight will be : : (area 1+2+4) (area 3+5)

So, the monopolisation industry has resulted in a loss of total surplus of (area3+5).The producer gain is less than consumer loss.The net loss of total surplus is called Dead weight loss.

REMARKS: Possible social advantages from powerful firms.Advantages in the sense economises of scale and more research and development.

D.OTHER MARKET FAILURE: 1. Ignorance : Advertising are very important for the customer who are ignorant .By this they came to know about the duration and negative sides of misleading the goods as the customer purchased a T.V for life-time. After some years durable of T.V falls. 2.Uncertainity:Economics decision are taken based on the expected future .But,if the future is unknown,the decision may taken out to the wrong. 3.Dependent: people sometimes depend upon other to take decision.A free market may response however it is good or bad.Government says it is necessary toprotect dependents. 4.Principle-Agent problem:It occurs where people or firms (principles),as a result of lack of knowledge ,cannot ensure that their best interests are served by their agents.It happens for asymmetric information between principle and agents.

GOVERNMENT INTERVENTION: A.TAXES AND SUBSIDES:

Government imposes tax on the production equal to the marginal pollution cost.so,firms needs to pay on the tax equal to the external cost which creates maximises the profit on Q2 Where P=MC+TAX.when firm produces Q1,Where P=MC ,but in doing so no account of external pollution costs it imposes on the society. Marginal pollution cost is shown the distance between the MC and MSC curve which is equal to tax.

B.Laws and regulation: Laws are................ 1.The laws which prohibit or regulate behaviour that imposes external cost. 2.Laws that prevent firms for providing and misleading information.

3.laws that prevent monopolies and oligopolies. C.Changes in property cost: That means the person who owns property,to what uses it can be put,the right-s other people have over it and how it transferred.Extending this right,individual may be able to prevent other people imposing cost of them or charge them for doing so.

D.Provision of the information: When ,market failure occurs government provide information to correct the failure.

DRAW-BACKS OF THE GOVERNMENT INTERVATION:

y y y y y y

Shortage and surpluses Poor information Lack of Market incentives Shift of Government policy Lack of freedom for the individuals Bureaucracy and inefficiency

Conclusion: All of the people of the society has personal responsibility to reduce the noise and pollution which will make undesirable externality to the society for meeting the social efficiency that will help to adjust the market equilibrium.