Adapted from an actual H2 A levels Economics examination
Usually, a market is left to market forces to work in a free
market system. However, if the market fails to achieve Pareto optimality, where
society’s welfare is not maximized, the government should intervene to reduce
the welfare loss. Imperfect information and immobility of factors of production
are examples of market failure.
Imperfect information happens when there is no perfect
information flow, where either the buyer or seller made a decision before
understanding the goods and services or the consumer needs due to the lack of
time or expertise in it. It also happens between sellers especially when one
has more market power over the other. Imperfect information is seen when
consumers are left to choose a variety of similar products at supermarkets, not
knowing which is best for them. Therefore, they may make the wrong decision and
not consume the good that they exactly want or need, reducing their utility and
resulting in welfare loss.
Another example of imperfect information is asymmetric
information. Asymmetric information happens when one party, either the buyer or
seller, knows more than the other party. An example of a case where buyer knows
more than seller is consumers of insurance know more about their health and may
choose not to let the insurance company know. Consumers that are more prone to
illnesses usually buy insurance to cover them, causing the insurance company to
make a loss. An example of a case where seller knows more than buyer is a
promoter knowing his product well but he will only choose to tell the
advantages of the product using persuasive talking, resulting in the consumer
making the wrong decision as her cost-benefit analysis is biased. This will
thus lead to welfare loss, causing the market to fail.
Immobility of factors of production causes market failure
when there is a geographical or occupational immobility. These are forms of
labour immobility as with the help of international trade, capital and
enterprise are more mobile while factors of endowments like oils and minerals
can be traded from one another.
Geographical immobility happens when one does not want to
move to another country or state to work even if there is a more suitable job
available. This is caused by the difference in culture, cost of living, family
relations and many other reasons. These will lead to the worker having to
choose a less suitable job that he may not be as skilled in, resulting in
welfare loss since he does not use his skills fully and efficiently, therefore
the market fails.
Occupational immobility happens when there is structural
unemployment and people cannot find themselves a new job as they only have
skills for the sunset industry which is not in demand for workers. There is a
mismatch in the jobs available and skills of workers causing the labour force
to be not fully employed while having shortages in firms especially from
sunrise industries, thus output is reduced and there is a welfare loss, causing
market to fail.
In conclusion, imperfect information and immobility of
factors of production are common causes of market failure in reality.
Government should therefore step in to use a range of interventionist policies
to reduce these welfare losses and aim to achieve Pareto optimality through a
combination of policies.
JC ECONOMICS ESSAYS: Economics tutor's comments - This economics paper is direct, clear cut, and to the point, and tries to address the requirements of the economics question posed as clearly as possible. The conclusion to this essay is simple but well thought through, and does not need to be long, analytical, and evaluative simply because this is an "explain" question (that is the command word) and also because this is not a 13, 15, or 25 mark paper, which would require a more developed, evaluative, and judgmental conclusion to get the highest possible marks in an examination. This economics paper has all the relevant economics material, theories, and ideas, but could profit more perhaps from more direct examples and specific real world examples that are applied to the context, which could develop the essay further. However, the usual questions also apply here - how could this essay be further improved? Special thanks to A G and other contributors who contributed this economics material. Thanks for reading and cheers!
