Compare And Summary: The Four Traditional Market Failures

• Deviations from the traditional economic model and it’s underlying assumptions constitute market failures.

• Traditional market failures are “shown as circumstances in which social surplus is larger under some alternative allocation to that resulting under the market equilibrium.”

• The four common market failures are: public goods, externalities, natural monopolies, and information asymmetries. It is because of such failures that rationale exists for intervention (usually from the government) in otherwise private affairs.

Public Goods:

• Whether a good is considered public (or private for that matter) rest upon its degree of consumption (rivalarous or nonrivalrous) and the extent of its ownership (excludable or nonexcludable).

• Rivalrous

national defense; free-riders)

• Nonrivalry, Nonexcludability, Congested: Ambient Public Good with Consumption Externality (Overconsumption because consumers ignore external cost; i.e., polluting a lake or the air)

• Rivalry, Nonexcludability, Uncongested: Free Good (Supply exceeds demand at zero price)

• Rivalry, Nonexcludability, Congested: Open Access and Common Property Resources (Users own the good in common; consumers respond to marginal private costs rather than marginal social cost; inefficient overconsumption, underinvestment in preserving the stock of goods; what’s not consumed by one will be consumed by another, i.e. forest used for firewood)

• In summary, the efficiency implications of the various types of market failures involving public goods are as follows:

o In toll good situations (nonrivalry/excludability), underconsumption arises from economically inefficient pricing rather than a lack of supply; this problem is exacerbated by congestion which results in the need for variable pricing to achieve