Market Failure

[xXNovaxX]

Hello

Does any1 have examples of a market failure based on a MONOPOLY....would this be alright as an example?

Thanks for the help!

[jerry]

Basically most monopolies would be a market failure (some exceptions being the case of natural monopolies).

If you have to use an example, just use Telstra (home lines)

[Collin Li]

Basically most monopolies would be a market failure (some exceptions being the case of natural monopolies).

If you have to use an example, just use Telstra (home lines)

Natural monopolies are market failures.

"Unnatural" monopolies are typically government failures.

[andrew4443]

On the topic of market failure, one of the questions from Romeo Sallas current economic questions was:
"Explain whether excessive remuneration of CEOs is considered to be market failure or not'

My thinking was that as CEOs are highly skilled and in short supply, their wage is pushed up (reflecting the normal operation of the free market). Therefore this couldnt be considered market failure, but the whole 'excessive' thing makes it seem as if it is

Could anyone shed some light on this?

[jerry]

Basically most monopolies would be a market failure (some exceptions being the case of natural monopolies).

If you have to use an example, just use Telstra (home lines)

Natural monopolies are market failures.

"Unnatural" monopolies are typically government failures.

My mistake.

[Collin Li]

On the topic of market failure, one of the questions from Romeo Sallas current economic questions was:
"Explain whether excessive remuneration of CEOs is considered to be market failure or not'

My thinking was that as CEOs are highly skilled and in short supply, their wage is pushed up (reflecting the normal operation of the free market). Therefore this couldnt be considered market failure, but the whole 'excessive' thing makes it seem as if it is

Could anyone shed some light on this?

Excessive is just the media's loaded terminology -- the economist didn't say "excessive" so don't take it seriously.

If anything, there are some that are underpaid CEOs due to information problems called adverse selection. If it is unclear which CEOs are quality or not, then the market cannot distinguish between the good and bad. And say 50% are good and 50% are bad. Then companies are willing to pay in between a bad and good wage. That might encourage some good CEOs to leave the market, causing quality to reduce, and lowering wages further as the market realises CEOs are crapper now, and then causes a spiralling exodus of good CEOs.

[xXNovaxX]

On the topic of market failure, one of the questions from Romeo Sallas current economic questions was:
"Explain whether excessive remuneration of CEOs is considered to be market failure or not'

My thinking was that as CEOs are highly skilled and in short supply, their wage is pushed up (reflecting the normal operation of the free market). Therefore this couldnt be considered market failure, but the whole 'excessive' thing makes it seem as if it is

Could anyone shed some light on this?

and just ON that, I came across a topic on market failure on Merspi  http://merspi.com/questions/234/explain-an-example-of-market-failure

But just on Market failure,, um, I also heard the GFC is counted as a Market Failure...can some1 maybe shed some light?

[Craxe]

Natural monopolies are not always deemed to be market failure. Indeed, they are often considered to benefit economic activity. This is because monopolies often allow businesses to cut costs - in the phenomena known as economies of large scale production. They can produce larger quantities at lower costs. This allows them to cut costs - which boosts technical efficiency.

Monopolistic competition, conversely, is considered to be market failure because, in these instances, firms use their unique product to artificially raise prices.

There is a distinction...

[Collin Li]

Natural monopolies are not always deemed to be market failure. Indeed, they are often considered to benefit economic activity. This is because monopolies often allow businesses to cut costs - in the phenomena known as economies of large scale production. They can produce larger quantities at lower costs. This allows them to cut costs - which boosts technical efficiency.

Monopolistic competition, conversely, is considered to be market failure because, in these instances, firms use their unique product to artificially raise prices.

There is a distinction...

Oh, that is very true. The term is misleading because it suggests the opposite is "unnatural", which would imply some kind of government action is holding it up -- that is merely government failure, not market failure.

Natural monopolies are "natural" in the sense that the market is supposed to favour 1 company. It can still produce market failures (because this company can then price gouge), but not necessarily, like you mentioned. Usually, if there are competitive threats from entrants or substitutes, this will lead to an almost efficient monopoly!

[Collin Li]

On the topic of market failure, one of the questions from Romeo Sallas current economic questions was:
"Explain whether excessive remuneration of CEOs is considered to be market failure or not'

My thinking was that as CEOs are highly skilled and in short supply, their wage is pushed up (reflecting the normal operation of the free market). Therefore this couldnt be considered market failure, but the whole 'excessive' thing makes it seem as if it is

Could anyone shed some light on this?

and just ON that, I came across a topic on market failure on Merspi  http://merspi.com/questions/234/explain-an-example-of-market-failure

But just on Market failure,, um, I also heard the GFC is counted as a Market Failure...can some1 maybe shed some light?

The cause of the GFC, or the conditions resulting from the GFC? They are both different types of market failure!

The first is from information assymmetry, causing misallocation of resources (allocative efficiency), while the latter is due to a 'cooperative disorder' (by no means an official term, but it's kind of like a positive externality) where individuals are unwilling to invest in banks they have lost confidence in. There are thought to be two equilibria in banking models: the cooperative outcome (where people invest in banks, banks invest to make returns for you), and the uncooperative outcome (people don't invest in banks because they think banks will bust, but this belief leads banks to bust, since people withdraw their deposits!)

[AppleXY]

Indeed, clearly lending to subprime lendees is unsustainable in the long run. Credit derivatives in itself is not a market failure (as derivatives naturally hedge risk), but they were being used in the most unsustainable behaviour showing the biggest misallocation of resources I've seen to date. Many main street investors were fed twisted information, whilst only the big guns in Wall Street having access to the $100tn or so (i think?) market. Clearly it'd be unsustainable and lead to bubble burst.

And collin is exactly right for the market failure from the conditions arising from the GFC. If the U.S. Government didn't inject the TARP package to the major financial institutions, this would cause a major collapse of the whole American banking and financial system. But at least then the market would be clean of all the failures resulting from those toxic derivatives. In reality though, the results would be too devastating to measure.

Every single aspect of the GFC is market failure:

- Heavy Misallocation of resources into Credit Derivatives to cover Subprime Mortgages
- Information asymmetry
- Resulting outcomes, including bank runs due to the GFC