This economics essay explains that the two main
sources of market failure in the British car industry are imperfect
competition, especially arising from market power, which leads to productive and
allocative inefficiency.
While there are many sources of market
failure, such as the failure of the free market to provide public goods, the
under-provision of merit goods, while demerit goods are over-consumed if their production and consumption are left to
the workings of the free market, one possible cause of the market failure of imperfect competition due to excessive market power in the British car industry.
The British car market can be characterised as an oligopolistic market. Broadly speaking, the car industry in the UK is known for producing cars such as Aston Martin, Bentley, Daimler, Jaguar, Land Rover, Lotus, McLaren, Mini, and Rolls-Royce, and also popular Japanese cars such as Honda, Nissan, and Toyota. As this market is oligopolistic, there are relatively few sellers, often of large size as can be seen in the examples, a differentiated product, and relatively high barriers
to entry, such as patents, technology, and legal barriers. (For the purpose of simplicity in this essay, let us assume that these oligopolies do not collude or form cartels.) Barriers to entry are
defined as be man-made or natural obstacles to free market competition, and
this is one area where the British car industry suffers. For example, the UK has a strong design and technical base which means that its cars are likely to be highly differentiated products with no close substitutes, which confers a certain degree of market power.
Question: What economics diagram do you think should be drawn here? How would you explain the diagram to support your arguments?
The net result of this market power is that, according to economic
theory, the price of the cars produced will be larger than the marginal cost it
takes to produce the car. When P>MC, it means that the industry is
allocatively inefficient. Allocative inefficiency is defined as the situation
where society’s resources are not being maximised. Large oligopolies, such as Aston Martin, Bentley, Daimler, Jaguar, Land Rover, Lotus, McLaren, Mini, and Rolls-Royce, tend to be allocatively inefficient, and therefore tend to be productively
inefficient as well. Productive inefficiency occurs when the price of the
product is higher than the average cost required to produce the product,
because if the car industry were efficient, P = MC = AC, in a perfectly
competitive situation.
In conclusion, the car industry in the United Kingdom
suffers from imperfect competition, with market power resulting in productive and allocative
inefficiency.
Economics Tutor's Comment - This is a commendable effort for the A levels, but think of how the examples could be more explicit and targeted towards answering the question. How would make this essay even better? Thank you for reading and cheers.
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This Economics
post with comments was contributed by WT, an Economics expert who helps students understand the beauty of Economics and its
applications in real life. WT has a strong interest in Econometrics, Economic
History, International Trade, and Game Theory, especially with its applications to real economic situations. This economics post was edited by S. S., the editor of JC Economics Essays.
