Market failure is a situation in which the free market fails to allocate resources effectively, causing a situation where the quantity demanded by the consumer is unequal to the quantity supplied by the supplier.
There are many reasons why market failure can occur, and it is not a rare occurrence. This appears to be backed up in statements by Nelson (1987) and Dahlman (1979), quoted in the textbook Economic Efficiency in Law and Economics: “A fundamental problem with the concept of market failure, as economists occasionally recognise, is that it describes a situation that exists everywhere” (Zerbe, 2002, p. 168).
Below I will look at some of the main reasons why market failure occurs, with examples, and where applicable talk about how government intervenes to try and correct it. I will then identify market failure within the London property market and how government has intervened. Finally I will analyse the methods used by government and look into any possible areas of ‘government failure’, which is the term used to describe a situation when government intervention in the economy to correct market failure actually exacerbates the problem.
Public goods, as outlined by McConnell and Brue (1999, pp. 87,88), are indivisible to individual buyers and it would be impossible to exclude individuals from benefiting once these goods/services come into existence. An example of such public goods would be a lighthouse on a treacherous coast. It would be economically justified, as the benefit of fewer shipwrecks would far exceed its cost. The benefits to each individual, however, would not be great enough to justify them paying an individual fee. Furthermore, once i...
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...One of the biggest problems is a serious unresponsiveness of supply to growth in demand. Demand for houses then drives up prices, leaving an even bigger shortage of options for those on a lower income.
Furthermore the report suggests that overall supply of housing in London has been in decline since the 1960s, with no corresponding decrease in demand. For decades the council house building programme compensated for this; the fall in levels of construction of social housing has therefore hit the affordable end of the market hardest.
The reason government intervenes in the housing market is to guarantee a certain standard of home for every family at a price within their means. My own interpretation of this is that it quite correctly sees affordable housing as a merit good. It is certainly debatable, however, how successful it has been in achieving this objective.
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