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 Course notes quick navigation

1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix

Market failures

Markets will fail to allocate the nation's resources in ways that maximise national living standards or the economic welfare of all Australians.  Markets, left unregulated, will tend to result in an over-allocation of resources to the production of some goods and services and/or an under-allocation of resources to the production of others.  Accordingly, unregulated markets will lead to an inefficient allocation of resources that requires some form of government regulation or intervention.

For example, the profit motive and self interest cause the market to over-produce a variety of goods and services that are not in the nation's best interest, such as drugs like speed and ecstasy, and under produce some goods and services that are in the nation's best interests, such as national defence and prisons.  Some other problems inherent with markets are their tendency towards market concentration and anti-competitive behaviour, the high incidence corporate dishonesty, lack of protection for the less privileged and a lack of account for both positive and negative externalities.  

As a consequence of these market failures, governments intervene to ensure that our resources are re-allocated in such a way that the 'net benefits' to society are maximised - that is, we are closer to achieving the most efficient allocation of our resources.  In a broader sense, this means that government efforts are designed to improve 'allocative efficiency,' where this is defined as an allocation of resources where the living standards or welfare of Australians is maximised

The following market failures will be addressed in this section:

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