Explain with real world examples why markets might fail in the case of public goods and where information is imperfect. [10]

This paper explains, using real world examples, the market failures caused by public goods and imperfect information. Market failure refers to the situation where the free market fails to achieve the socially optimal outcome that maximises society’s welfare, and therefore fails to allocate resources efficiently. The market is said to be allocative inefficient. There are several sources of market failure, which include positive and negative externalities; the underconsumption of merit goods but overconsumption of demerit goods; the lack of production of public goods if they are left to the free market; market dominance, such as the existence of monopolies and oligopolies; the presence of imperfect and asymmetric information; and the immobility of the factors of production. Public goods and imperfect information would be the focus of this essay.

A public good refers to a good which is non-excludable and non-rival. Some common and popular examples of public goods include national defence and street lighting. "Non-excludable" means that it is impossible or impractical to prevent a person who has not paid from consuming the good. This implies that consumers would be unwilling to pay, as they are able to enjoy the benefits without paying, thus giving rise to “free riders”, resulting in firms lacking an incentive to produce the good and therefore a missing market. 

"Non-rival" means that the consumption of the good by a person does not diminish the quantity or quality of the good available to others. "Non-rival" implies that, once the good is produced, the Marginal Cost (MC) of allowing an additional person to consume the good is zero. Therefore, if the allocative efficient level of consumption is where Price (P) = MC, and MC = 0, then P = MC = 0 suggests that the good should be optimally provided for free, necessitating government provision. 

Hence, public goods are a form of market failure and government provision is required. Governments have the willingness and ability to produce public goods due to their non-profit nature, and unlike private firms, are able to raise compulsory taxes which citizens are compelled to pay, for the production of the public good. 

On the other hand, imperfect information refers to the situation where an agent lacks all relevant information with which to make a rational decision. 

Negative externalities refer to the adverse effects imposed on third parties arising from the production or consumption of a good. A demerit good is an undesirable good which the state believes will be over-consumed and over-produced if left to the workings of the free market. In the case of negative externalities and demerit goods, some consumers may be unaware or may underestimate the harm done to themselves and to others when certain goods are consumed or produced, and thus do not take into account the costs for themselves and on larger society. In other words, due to imperfect information, some individuals may be unable to factor in the full private costs of consumption – perceived Marginal Private Cost (MPC) is less than the actual MPC. This is shown in the above diagram, where the actual MPC, which is also the Marginal Social Cost (MSC), lies above the perceived MPC. The private outcome is Qp where perceived MPC = Marginal Private Benefit (MPB), whereas the social outcome is Qs where Marginal Social Benefit (MSB) = MSC. Between Qs and Qp, because MSC > MSB, the shaded area representing the negative welfare, the deadweight loss, can be eliminated if output were reduced from Qp to Qs. Since Qp > Qs, the good is overconsumed. Cigarettes are an example of a demerit good with negative externalities in consumption. Due to a possible lack of knowledge of the adverse effects arising from the consumption of cigarettes, smokers place themselves and nearby passive smokers at risk from suffering future health problems. 

THINK: What economics diagram should be drawn here, and what should the diagram show?

Positive externalities refer to the benefits enjoyed by third parties arising from the production or consumption of a good. A merit good is a desirable good which the state believes would be under-consumed or under-produced if left to the workings of the free market. In the case of positive externalities and merit goods, some consumers may be unaware or may underestimate the benefits enjoyed by themselves and to others when certain goods are consumed or produced, and thus do not take into account the benefits for themselves and on larger society. Training of workers are an example of a merit good with positive externalities in production as it generates a positive benefit for other firms when these workers work there. However, due to imperfect information, companies may be unwilling to send their own workers for upgrading, thus leading to the good being under-produced and therefore market failure.

In conclusion, the free market may experience market failure due to other sources besides public goods and imperfect information. Hence, the government could decide to intervene to establish allocative efficiency as part of their micro-economic goals.

JC Economics Essays - This A level economics essay response was contributed by Wilson YWS, and is one of the best essays that he has written. The response is clear, simple to understand, and shows that the student understands what the economics question demands. 

However, the major issue with it is that the real world examples could be better used to bring out and illustrate the various elements of the theories. 

Looking closely at this essay, how could the real world examples be better used to show that there really is market failure? Merely stating the examples or bringing them out piece-meal would not be a very constructive approach. However, overall, this essay is still a strong piece of work on balance but one that could be even better if it were improved. 

Thank you very much for reading, and cheers. 

“A monopolistic firm has market power whereas a perfectly competitive firm has no market power. Perfect competition is, therefore, clearly preferable to monopoly, say economists. Discuss this statement. [25]

Monopoly is a firm which is the only seller of a unique product which has no close substitutes. In a market of perfect competition, the level of competition is very high, and each firm is a small entity, a price taker. There are four assumptions for a monopoly to exist: there is only one seller but many buyers, high barriers to entry (both natural and artificial), a highly differentiated product such that it is difficult or impractical to copy the product, and imperfect information. There are four main assumptions for a perfectly competitive market, which are: there are many sellers and buyers, low barriers to entry, homogenous product and perfect information. This essay attempts to explain the reasons for the high market power of a monopoly, low market power for a perfectly competitive firm, and the limitations of monopoly and the choice between a monopoly and a perfectly competitive market. 

Yes, it is true that monopoly has very high barriers to entry while a perfectly competitive market has very low barriers to entry. Barriers to entry refer to the reasons which deter potential entrants from entering the market. There are two types of barriers, which are natural barriers and artificial barriers. Monopoly often has high barriers due to various reasons. Firstly, when there is very high economies of scale of the existing monopoly firm, the starting cost of potential entrants will be very high as a result, and this is often because of high fixed costs, such as massive initial capital outlay followed by declining LRAC. 

Secondly, when there is limited and small market size, localized monopoly might arguably be present because the demand from the consumers is very low due to say a small population, which cannot support more suppliers. For example, there will be only one hairdressing shop in a small town because of its small population. 

Thirdly, when there are network economies, it is very hard for potential entrants to enter the market because of existing networks among users. For instance, after Facebook, it is difficult to have any more of the same type of online social network websites because users have built up broad network on Facebook already. 

These are main natural barriers. There are also artificial barriers to entry set up by governments and the existing firms as well. For example, patents, licenses, and regulations restrict potential entrants from entering. Existing will have limit pricing and predatory pricing to deter potential entrants from entering. Firms also can control retailers and suppliers to prevent potential firms. For example, deBeers controls the diamond resources of the world and can restrict diamond production. Therefore, a monopoly has very high barriers to entry to limit the number of existing firms to a very low number, i.e. one firm. The monopoly has very significant market share hence strong market power to control the price while a perfectly competitive firm has many competitors in the market and therefore their market share is insignificant as a result of this very low market power. Hence, a perfectly competitive firm is a price taker, whereas a monopoly can set output and accept a price, or set the price and accept the resulting output. 

[Insert diagram on PC Industry and PC firm]

The perfectly competitive firm takes the price from the intersection of market demand and supply. To maximize profit, the firm will produce at MC = MR at price P. In the long run, a perfectly competitive firm will gain normal profits when LRAC = P at minimum efficient scale (MES). 

Therefore, a perfectly competitive firm is productive efficient because it always produces along LRAC curve and every firm in the industry tries to produce at MES for maximized profits and minimized costs for survival. A perfectly competitive firm is also allocative efficient because P = AC. It gains maximum social welfare. 

A perfectly competitive firm is also equitable because it gains normal profits in the long run. There are therefore good and solid reasons for the preference of a perfectly competitive firm than a monopoly. A monopoly is productive inefficient , allocative inefficient, and inequitable as explained below. 

[Insert diagram on Monopoly Firm showing Supernormal profit and Deadweight loss]

A monopoly is productive inefficient because the firm has great market power and it can be X-inefficient, which means that it does not act energetically to curb its costs, for instance costs from lobbying for government intervention. It can produce above the LRAC curve due to overpaying for workers, building ostentatious buildings, or unnecessary perks. 

A monopoly is allocative inefficient because of the deadweight loss resulting from monopoly power. At the profit maximizing point, MC = MR, and P > AC. Hence, there is a positive welfare to be achieved by promoting perfectly competitive firms.

A monopoly is not equitable to consumers because of its supernormal profits gained in the long run. 

However, a monopoly can be preferred to a perfectly competitive firm because it is dynamic efficient. It has the willingness and ability to innovate and create to do research and development (R&D) and to improve its product variety through product proliferation. This is because of its supernormal profits in the long run, leading to its ability to conduct R&D. It also aims to utilise product proliferation to fill the product gap, and thereby prevent potential entrants from finding a niche to exploit in its market that it dominates. A perfectly competitive firm is also not willing to innovate because of perfect information in its market, so other firms can easily copy from it, so a monopoly does have some strengths. 

[Insert diagram to compare PC firm and Monopoly]

A monopoly firm usually restricts output and set high price at maximized profit level, while a perfectly competitive firm has lower price and more output at the intersection point of its demand and supply. At this point in time, a perfectly competitive firm is preferred to a monopoly. However, in the long run, when a monopoly grows and exploits its economies of scale, it moves its (LR)MC curve downwards. It can then produce more output at a lower price. At this time, a monopoly is preferred to a perfectly competitive firm due to its dynamic efficiency. 

In conclusion, it is not always preferable to have a perfect competition than a monopoly. Ostensibly there are many good points that perfectly competitive firms have, such as productive efficiency and allocative efficiency, among other ideal points, whereas monopoly does appear or seem not ideal, due to its lack of productive and allocative efficiency. However, a monopoly has more dynamic efficiency than a perfectly competitive firm and has the potential to have lower prices than a perfectly competitive firm. In addition, a perfectly competitive market is ideal but does not exist in the real world. Hence, monopoly is sometimes preferable to a perfectly competitive firm. 

JC Economics Essays - H2 Economics essay on monopoly and perfect competition. Normally I would give detailed comments for essays and make some commentary or remarks on how good the essay is, or how it can be further improved by identifying particular points, arguments, or even sometimes, rarely, mistakes. Sometimes, I even ask difficult thinking questions about how the essay can be improved. However, for this particular essay done under timed examination conditions, I rather like its style and content, and so instead of giving my comments I will let you do most of the thinking: one simple question is - what can you learn from this economics essay? Thanks for reading and cheers. 

Explain with relevant examples why imperfect information and the immobility of the economic factors of production lead to market failure.

Market failure refers to the situation where the free market fails to achieve an outcome that maximizes society’s welfare, of which imperfect information and the immobility of the factors of production, which refers to the inability of resources to move perfectly from one market to another in response to changing market conditions, would lead to market failure as well. In my essay, I explain how the above two factors cause market failure.

Imperfect information is the situation where people engage in economic transactions without having perfect information of what they are buying, due to a discrepancy between the perceived benefit or cost and the actual benefit or cost. Due to the lack of perfect information, consumers end up buying something that is not what they really want or need. This is because consumers are often swayed by persuasive advertising and sales staff pushing products based on commission. As a lot of time and effort is required for one to acquire all the necessary information as they lacked the time and expertise to learn about the many products in the market, this principal-agent problem is likely to persist. Hence, when a consumer buys a good that is not what they really want or is less suitable, his welfare is below the socially optimum level and this gives rise to market failure. 

Imperfect information also contributes to market failure that arises from negative externalities and the presence of demerit goods. This is because adverse effects are imposed on third parties when these goods are produced or consumed. Externalities are defined as third party spillover effects, where third parties are affected when goods are produced or consumed, and demerit goods are goods which the government deems undesirable in the light of consumers lack of information or due to the negative externalities imposed on third parties.

In this case of demerit goods, individuals are unaware of the social cost incurred during their consumption of the good. Both negative externalities of production as seen in the figures below. Without government intervention, MPB = MPC and output is at Qp. The social equilibrium Qs is at MSB = MSC. Since MSC > MSB, a deadweight loss is generated. Since Qp > Qs, the good is over-produced. 

[Insert diagrams on negative externalities from production and consumption]

As for demerit goods, when MPB = MPC, the output is at Qp. However, the social outcome Qs is where MSB = MSC. Between Qp and Qs there is a loss of potential welfare (deadweight loss). Since Qp > Qs, the good is said to be over-consumed. 

As for factor immobility, there are two major types – occupational and geographical immobility. Occupational immobility of labour arises because workers lack the required education or skills to take on new jobs in another industry. For instance, people working in fields with low technology will find it hard to work in Silicon Valley due to their lack of knowledge, thus making them occupationally immobile. On the other hand, geographical labour immobility exists in large countries when there are barriers to people moving from one region to another in search of jobs. This barriers include family and social ties and cost involved in moving to another area to settle down. Large countries like the USA and the UK will face these sorts of geographical immobility problems and issues. 

Market failure arises as resources are unemployed due to factor immobility and hence the economy is producing inside its PPC. Hence, the outcome is productive inefficient and also allocatively inefficient.

[Insert a diagram on production possibilities curve]

The diagram shows that there are unexploited resources untapped, and therefore there is productive inefficiency. Also, there could be market failure due to allocative inefficiency. This is because resources are unable to flow from contracting to expanding markets. Hence, society’s welfare is not fully maximized and it can be argued that market failure results. 

In conclusion, imperfect information is often present in market dominant firms such as oligopolistic and monopolistic firms as they are price setters with large market power, often arising from possession of asymmetric information. Imperfect information prevents consumers from knowing all the prices and the product production processes also. Therefore, it is difficult to remove the presence of imperfect information as it is so prevalent. Factor immobility is also another common cause of market and it is difficult to be eradicated. Hence, market failure would tend to persist.

JC Economics Essay - H1, H2, H3 economics essays - tutor's comments: There are a lot of small problems with this economics paper that can be easily remedied, and therefore the question is: what are the areas that need to be worked on for this essay? Having said that, there are many salient strengths to this economics essay answer as well: think, what are the strengths and good points of the material presented in this economics essay? While fairly strong in economic theory, and covering most of the relevant ground to address the question posed, and having lots of interesting angles and possible areas of discussion, this economics essay answer could have more relevant examples and be more vivid, clearer, and better by giving specific real world examples for each model, theory, or economics concept mentioned. This economics essay could have pushed the envelope, but did not go too far nor did not stretch the point to emphasise, highlight, showcase certain good economics material, which would have vastly improved it. What other areas of improvement do you see and notice, and how would you have approached this essay question? Think about how to improve on this economics essay - how you can value add to this suggested, possible answer. Special thanks to A G and S S for their contribution. 

"Oligopoly is the most appropriate economic model of market structures that can best explain the behavior of companies in Singapore." Discuss. [25]

There are four models of market structure, namely, perfect competition, monopolistic competition, oligopoly and monopoly. In a perfect competition market, many sellers sell a homogeneous product to many buyers. In a monopolistic competitive market, many sellers sell slightly differentiated products to many buyers. A monopoly refers to a market which has only one seller of a unique product without close substitutes. An oligopoly is a firm that has several rivals, selling either a differentiated or homogeneous product, and with high barriers to entry. Firms of different industries belong to different market structures because of their different products and conditions, and different market structures have different assumptions. This essay attempts to explain the behavior of firms in Singapore according to different market structures and conclude whether oligopoly is the most appropriate model of market structure to explain the behavior of firms in Singapore.

As oligopolistic firms are always rivals to each other and have significant market share in which they jostle and engage other rivals, there will be non-price and price competitions among the few firms in an oligopolistic market. It can be argued that non-price competition includes engagement in research and development and advertising. In the long run, oligopolistic firms usually gain supernormal profits hence they have the ability and the willingness to innovate and differentiate their products from the rest further more.

Oligopolistic firms also involve in advertising. Advertising increases the demand for a product and makes it more price elastic. This enables a firm to charge higher prices but yet sell more output, thus raising its total revenue. A firm decides to advertise if it believes that the additional revenue earned will exceed the advertising expenditure incurred, thereby raising profits. Oligopolistic firms often advertise and innovate to compete effectively for survival. 

Advertising can be seen as either being informative or persuasive in nature. Informative advertising informs the consumers about the characteristics of the product while persuasive advertising aims to create brand awareness and loyalty by creating a certain image of the company of the type of consumers that the product is targeted at. Oligopolistic firms usually implement persuasive advertising. They tend to engage in more costly forms of advertisements, like having celebrity endorsements, placing large and prominent advertisements on billboards, newspapers, popular magazines and websites and advertising frequently on television. This is because they have very large output to spread out such high advertising costs unlike monopolistic competitive firms, which have considerably lower levels of output. In Singapore, firms which are oligopolistic also set up many advertisements to attract consumers and create loyalty. For example, famous brands that operate in Singapore such as L’OREAL, VISA or Ricola, always have advertisements showing before movies in the cinema. These advertisements are usually very costly due to the fact that every audience has to watch them and the advertising effects are great.

There is also price competition between oligopolistic firms, which can often be observed in reality in Singapore. Anti-competitive pricing, for example, limit pricing or predatory pricing manage to deter the entrance of potential firms or undercut existing rivals in oligopolistic markets. In addition, the high possibility of price wars also raises barriers to entry. Therefore, only few large firms remains in several industry groups in Singapore. For instance, the fast food industry, Mcdonalds , KFC and Subways are the oligopolies. 

However, there are alternative models of market structure to explain the behavior of firms in Singapore. For instance, monopolistic competition, which has four assumptions. There are large number of buyers and sellers, low barriers to entry, differentiated products and imperfect information. As individual firm’s action has no impact on its competitors and it is thus able to make independent price and output decisions. Monopolistic competitive firms, such as restaurants (Ding Tai Fung) in Singapore, hair salons (Kimage) in Singapore, and so on, sell differentiated products. This means that the products sold by one firm are similar but not identical to those sold by its competitors. Product differentiation can be real or imaginary. Due to product differentiation, a monopolistic competitive firm has some degree of market power. A monopolistic competitive firm is able to charge more than its competitors without necessarily losing all its customers because there are some customers who would still prefer its products as it better suits their preferences. 

In the long run, monopolistic competitive firms gain normal profits due to free or low barriers to entry or leaving of the market. Hence they have much lower willingness and ability to do research and development or advertise compared with oligopolistic firms. The price competition among monopolistic competitive firms is very low. They set prices independently of other firms. There is no reason to undercut competitors or engage in price wars as impact on other firms is insignificant. In Singapore, many firms are monopolistic competitive firms. For example, all the food stalls in the food courts in Singapore are monopolistic competitive firms, just as are hawker food stalls in Singapore. This is because they sell differentiated food from each other and they set their own prices. To open a small food store is not difficult or expensive. There are many food stores in Singapore and many people having their meals at these stores.

In Singapore, the national train company SMRT can be treated as a monopoly in train service industry because it takes a large proportion of the routes. A monopoly of train service, there is no price competition because SMRT is the price setter. If people want to take the train, they generally have to choose SMRT without any close substitutes. The high startup costs and running costs deter other companies from entering the train market. Hence there is no need for SMRT to use predatory pricing or limit pricing. In the long run, a monopoly gains supernormal profits. Hence, it has the ability to innovate and do research and development although it has no need to do so. SMRT can do that for increasing profits but not for survival. However, it has to in Singapore because if it cannot provide better and safer services, the government may choose to change it to other firms. 

In conclusion, oligopoly, monopolistic competition and monopoly can be used as models of market structure to explain the behavior of firms in Singapore, while clearly the idealistic model of perfect competition is always not present in the real world. In my opinion, among the three economic models, oligopoly may not be the most appropriate model because there are more small firms present in Singapore, which are monopolistic competitive firms. Different industries have different conditions hence firms may behave differently. People cannot predict that one model of market structure can explain everything. To conclude, oligopoly is an important and quite appropriate model of market structures only in some contexts and for some firms in Singapore, but not all.

JC Economics Essays - H2, H3 economics essays - tutor's comments: The essay answer addressed the requirements of the question quite well, but in an actual economics essay examination there should be appropriate, relevant, and useful economic diagrams. This is important - diagrams are important in economics and should be used whenever appropriate. What economics diagrams could have been used here? Note that when it comes to "A" levels or even undergraduate economics, economic concepts and ideas can be expressed in words, diagrams, or mathematics (which some say is a language). Therefore, for economics essays it is best to be fluent in words and diagrams/ graphs/ picture representations (for economic pictures, think of the "circular flow of income"). Also, think of the usual questions posed: how could this economics essay have been better written? Perhaps it could have benefited from more relevant and real world examples, or perhaps the examples could have been better explained in the context of the economic models? Having said that, this economics essay was answered under examination conditions, and is therefore quite high quality, well crafted, and well thought out with the required depth and range of economic ideas and concepts given a time constraint. Time management is very important in dealing with economics questions. What else do you notice about this economics essay answer? How would yours be similar, and how would yours be different? Special thanks to the contributors. 

Evaluate economic policies currently used by the Singapore government to correct imperfect information and immobility of the economic factors of production, to correct market failure. [25]

This economics paper is about economic policies in Singapore that target market failures, in particular imperfect information and immobility of the factors of production, which hamper the workings of the invisible hand through the price mechanism. The Singapore government has been active in combating market failure through the use of taxes, subsidies and laws. These policy methods have shown to be useful in reducing imperfect information and factor immobility. However, these policies are not foolproof and they do have their limitations. Therefore, in this policy essay, I would discuss if the policies adapted by the Singapore government have achieved their policy aims.

           

One of the laws implemented by the government is mandatory pricing. This policy requires all retail stores in Singapore to display their prices, which then allows consumers to obtain the pricing information more easily than before. This policy in general therefore reduces imperfect information and also allows price discrimination since it reduces the chance for shop owners to charge some consumers more than others.

           

Another of such laws implemented by the government would be the implementation of the ‘Lemon Law’. This law allows consumers to return the products within a stipulated period and it is usually within six months of purchase. This policy protects consumer rights as they are allowed to return the goods that they deem unsuitable for themselves. This reduces the impact of having imperfect information since goods are made refundable.

           

Also, the government has made it mandatory for hospitals to display their average hospital bills on their respective websites. This is because many people do not know the cost of seeing a doctor and this would affect the ability to make decisions and to seek the most suitable medical treatment. The publishing of prices also serve to reduce the extent of principle-agent problems since consumers are now able to obtain more information than before.

           

In addition, the government heavily subsidized primary and secondary education as education is deemed as both a positive externality, which refers to the positive spillover effects it can have on third parties, and a merit good, which refers to a good which the state feels will be underconsumed if it is left to the free market. Since children may not attend schools as they do not know what is best for them and their parents may be short-sighted and hence do not let their children attend school, subsidizing education will incentivize parents to send their children to school. To complement this, the government has established a law which makes attending primary and secondary school compulsory so locals can receive at least a basic education.

           

As for factor immobility, geographical immobility is arguably not directly applicable to Singapore since Singapore is a small country and has well-established transport networks. Hence, it will be unlikely that people will experience geographical immobility.

However, occupational immobility is a problem in Singapore and the government has done much to deal with it. Some examples will be subsidizing upgrading and computer courses for people so that these people can upgrade their skills and remain competitive and relevant in today’s society. Educating locals such as having English courses would also help them to find a better job. Hence, occupational immobility is corrected.

           

Going on to discuss the benefits of these policies, the use of laws is rather effective in reducing the problem of imperfect information. Mandatory pricing is useful as customers no longer has to ask about the prices before purchasing it and more price transparency allows consumers to compare prices between shops and choose the best and most suitable product for themselves. Shop owners and retailers are also unable to exploit consumers.

           

As for Lemon’s Law, it reduces the incentive of the sales person to boast about the functions of the product so as to get customers to purchase them. This is because customers now have the right to refund the goods if they are not satisfied with them. Hence reduces the chance of firms withholding information from customers in order to push up their sales.

           

Also, getting hospitals to display prices is a good move since pricing is definitely more transparent now and patients are able to make better choices for themselves in terms of deciding on their own preferred medical treatment. They would also not be taken aback when they see the amount they have to pay at the end of the treatment since they already do have the information.

           

Furthermore, the government has successfully prevented education from being under-consumed due to imperfect information. This is because Singapore’s literacy rates are one of the highest in the world and many enjoy the privilege of going to school despite their family background.

           

Lastly, education and training programmes implemented by the government has been useful in helping the retrenched get new jobs. It has also allowed many to obtain new skills and obtain better paying jobs than before and therefore improving their standard of living. Occupational immobility can be overcome through these policy measures.

In conclusion, the policies implemented by the Singapore government to correct market failure caused by imperfect information and factor immobility have largely been successful. However, there are some drawbacks. For instance, since hospitals want to remain competitive and to reduce their prices, they may sacrifice on their quality of service in order to cut costs. Also, as for the Lemon’s Law, a lot of administrative costs could be incurred as the products can be returned and it may be troublesome for firms to keep track of these requests. This law may also be misused by consumers as consumers may purchase the good and use it for a while and then return it later on when they no longer have use for it or grown sick of it. This puts firms at the losing end and they might not be able to profit from their businesses. In addition, it is very difficult to get adults to go for skills upgrading and training as they may have lost touch with it. Some may lack basic training as well and it would be difficult to undergo training and education. Hence, not all government policies are foolproof.

JC Economics Essays - H1, H2, H3 economics questions and suggested answers - Economics tutor's comments: This economics essay on market failure in the context of Singapore is very good in the sense that it provides a lot of economics application, and real life examples and answers. Examples are very good and should be used to provide a beautiful, well rounded answer to economics questions. However, it does not define many key terms and does not explain many of the economic theories that are relevant. Always remember to define key economic concepts and key economic terms because the examiner would want to see if the candidate knows his or her economics material well. Also, there is the need to use clear, well explained, economics diagrams to illustrate key concepts and arguments, which is sorely lacking in this economics paper. However, having said that, overall this paper can do quite well because of its strengths as well as the interesting evaluative comments and analysis made towards the end of the paper. What are the other strengths of this economics essay? Special thanks to S S, A G and S H for their contributions to this economics paper. 

Explain, with relevant examples, the economic circumstances when prices do not accurately or correctly reflect actual benefits and costs, and explain how free markets fail as a result. [10]

The general theme of this economics essay is on market failure. The circumstances when prices do not correctly reflect costs and benefits include the presence of externalities, both positive and negative, merit and demerit goods, as well as imperfect pricing information. Therefore, this essay aims to explain how the above mentioned circumstances will lead to market failure.

What are externalities? Externalities refer to the spillover effects on third parties arising from the production or consumption of a good. They can then be sub-divided into positive externalities, referring to benefits imposed on third parties, and negative externalities, referring to adverse effects imposed on third parties.

Prices are usually set at the intersection point of the market demand and supply curves. However, in the case of positive externalities, prices do not reflect the actual costs and benefits since the market demand and supply curves fail to take into account the marginal external benefits brought about by the consumption and production of the good.

[Insert diagrams on positive externalities from consumption and production]

Marginal external benefits (MEB) is defined as the additional benefit enjoyed by third parties from the production or consumption of a good. For positive externalities in consumption, assuming no externalities on the production side, positive externalities results in MSB exceeding MPB by the amount equal to MEB. Without government intervention, the private equilibrium is at Qp, where MPB = MPC. However, the socially optimum equilibrium is at Qs where MSB = MSC. Since Qp < Qs, the good is under-consumed, resulting in allocative inefficiency and hence the market fails. An example would be the consumption of vaccination, where the risk of disease is reduced for both the vaccinated person and third parties he comes into contact with.

Similarly, for positive externalities in production, assuming no externalities on the consumption side, there is a divergence between MPC and MSC due to MEB. The private equilibrium is at Qp where MPC = MPB, while the socially optimal equilibrium is at Qs, where MSC = MSB. Since Qp < Qs, the good is under-produced, resulting in allocative inefficiency and hence market failure. An example would be the production of honey which bees would pollinate the nearby fruit orchards.

In the case of negative externalities, prices do not reflect the actual costs and benefits as the market demand and supply curves do not take into account the marginal external costs bought by the consumption or production of the good.

[Insert diagrams on negative externalities from consumption and production]

Marginal external costs (MEC) id defined as the additional costs imposed on third parties from the production or consumption of a good. For negative externalities from consumption, assuming no externalities on the production side, there exist a divergence between MSB and MPB due to MEC. This results in the over-consumption of the good as seen from how the private outcome Qp exceeds the socially optimal outcome of Qs. The outcome is allocative inefficient and thus the market fails. An example would be smoking, where third parties incur costs such as the inhalation and breathing in of second hand smoke.

For negative externalities from production, assuming no externalities from consumption, there exist a divergence between MPC and MSC due to MEC. This results in the over-production of the good, seen from how Qp exceeds Qs, resulting in allocative inefficiency and hence the failure of the market. An example would be the disposal of industrial waste into rivers, causing water pollution which poisons the catches of fishermen whom are third parties.

Next, prices also do not reflect the actual costs and benefits in the case of merit and demerit goods. Merit goods refer to goods in which the state believes will be under-consumed if left to the free market because some individuals are unable to factor in the full private benefits of consumption. 

[Insert diagram on merit good]

For merit good, between Qp and Qs, MSB > MSC, thus the triangle pointing towards Qs represents the area of deadweight loss arising from allocative inefficiency, since the good is under-consumed. Hence the price will not be accurate in reflecting the benefits instead it is at MPB. An example would be the consumption of education where a person may leave school early because he is too young to understand education can improve his future. 

On the other hand, demerit goods are goods which the government believes will be over-consumed if left to the free market because some individuals are unable to factor in the full private costs of consumption.

[Insert diagram on demerit good]

For demerit good, between Qs and Qp, MSC > MSB and Qp > Qs, thus the triangle pointing towards Qs represents the area of deadweight loss arising from the over-consumption of the good, resulting in allocative inefficiency and thus market failure. Hence the price of the good will not be accurate in reflecting the costs since the demand of the good is at MPB, while it should have been at MSB. Examples of demerit goods include alcohol, where excessive consumption results in serious health and financial problems.

Lastly, where there is information asymmetry with regards to pricing, prices will not reflect the actual costs of production as sellers will be able to charge prices that are higher than marginal costs. This is due to the fact that buyers find difficulty acquiring pricing information from different sellers, thus gives seller pricing power and enable them to charge prices that are higher than marginal costs. Therefore, deadweight loss is generated and market failure occurs.

In conclusion, there are various instances where prices do not reflect the actual costs and benefits and in most of the cases, the resulting market failure arises due to the presence of allocative inefficiency.

JC Economics Essays - H1, H2, H3 economics essays - tutor's comments: This economics essay paper is very well done, by directly addressing the question requirements, and providing clear, simple to understand, direct examples that target the requirements of the economics exam question. Always remember to answer your economics exam question as it stands, and not as you imagine it to be. The student also has a very sound understanding of economic theory, and knows how to properly structure the memorised economics material and essay answer to make this paper a model essay. This model paper was done under timed conditions, which makes it even more remarkable. Thanks to S for editing work done, and thanks to A G and S H for their kind and invaluable contributions. Usual question applies - how can you apply this to your essay writing, and how could you write a better economics paper? Always seek to improve and better your standards. 

Evaluate the economic policies currently used by the Singapore government to correct imperfect information and the immobility of the factors of production, two major causes of market failure. [15]

Adapted from an actual H2 'A' Level Economics examination paper

Just like many other countries, Singapore has also been experiencing problems of imperfect information and immobility of factors of production thus leading to market failure. The Singapore government has come up with some policies in hope to improve the situation. This paper discusses the economic policies used by the Singapore government to correct imperfect information and the immobility of the factors of production. 

               

First, to reduce imperfect information, the Singapore government has tried to improve the flow of information through the use of the Internet. As more people do their research on the Internet to find out more about what they really want or need, putting more information on the Internet can help to improve information flow, though it may be more helpful to only the younger generation.

               

The Singapore Government also implements rules and regulations of compulsory food labels on all packaged food. They also introduced the healthier choice and safety labels  on food and appliances respectively to help consumers to make better decisions when consuming a product. As for the insurance company, there is a certain guideline where consumers have to report their medical condition or the company will not cover for them. Although it is easy to implement these regulations, there is a high regulatory cost to it.

               

The Singapore Government also set up many job agencies like Recruit Express and JobsCentral to improve the flow of information so that workers and employers can find a job or worker more easily and efficiently.

               

The Singapore Government can also initiate campaigns to raise awareness among consumers to read up on the product and look for labels on them before consuming a product in order to make a better decision. However, this might have time lag and it is difficult to for them to start making it a habit instantly.

              

As for occupational mobility, since workers do not have the right skills to work, government can provide tax cuts for employers who send their employees for courses to upgrade themselves or learn a new skill so that they will be more efficient and have better ability to handle their tasks better. Nonetheless, this may not be a popular policy among employers as they are making a loss by sending their employees for courses as it will result in a smaller workforce working thus lesser production while having higher cost incurred due to the course fees. Although, the firm will most likely benefit in the long run, employers cannot be certain that the employees will stay with them for a long time, therefore losing the long term benefit.

               

The Singapore Government has also set up the Workforce Development Agency (WDA) where they work with the unique tripartite trade union that Singapore has to subsidise firms that send their employees for courses to upgrade themselves or individuals to pick up a new skills so as to increase job opportunities for especially the unemployed. WDA will also try to link up the unemployed with a job during the training sessions so as to reduce the amount of lag time. Furthermore, government has set aside a Skills Development Fund to aid these people since Singapore is a small and open economy that often experiences structural unemployment due to an ageing population with many older workers. However, this may not be effective as it is difficult for older workers or less educated individuals to pick up a new skill especially since they have no basics to build on. Also, many workers will only see these courses as a waste of their time since they can be using the time to earn more money in order to cover their living expenses.

               

In addition, the Singapore government has implemented compulsory primary education for all citizens. Being educated will help them to take up new skills in future since Singapore’s small and open economy forces us to adapt to changes quickly by developing new comparative advantages to catch up with time. However, this requires a large amount of budget to be placed into education in order to make education affordable for all.

               

Lastly, the Singapore government has come up with urban planning to solve the problem of geographical immobility. We started to have small regional business areas like Tampines rather than all firms to concentrate at City Business District (CBD). This will not only help individuals to travel less since most housing estates are in the East, it also helps to divert traffic away from CBD.

                

In conclusion, the Singapore government should use a combination of market-based and non-market based solutions, as well as consider their long term and short term effects, in order to better achieve pareto optimality and reduce market failure.

JC ECONOMICS ESSAYS - Economics Tutor's Comments: This economics essay has a lot of good material on the Singapore government, economic policies, and the Singapore context, which is excellent - always address your material to the context of the question. Answering the essay question with reference to real world, relevant, and specific examples is an incredibly effective exam strategy in economics examinations. Remember always to have good examples alongside excellent understanding of economic theory and models. However, the usual questions apply - how would you improve upon the essay introduction? What is good or what is not so good about the body of the paper? What is good about the essay conclusion? Take note of the excellent use of signposting in the conclusion. However, how could the conclusion be buttressed and developed? What else could the student have written, or how could the student have written the evaluative conclusion better? Think about how you would write a better conclusion to make this economics essay the best that it can be. 

Explain carefully why imperfect information and the immobility of the factors of production might lead to market failure. [10]

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!

"Education is a Merit Good; The Government Should Pay for Education." Discuss. [25] (Rephrased Economics Question)

“Since education is a merit good, the government should pay for the people’s education up to, and including, tertiary education, such that education is free”. Discuss.  [25]

A merit good can be defined as a good that society deems desirable, or a good that has positive externalities to society. Education is definitely a merit good given that it is desirable to society, and certainly it seems to confer positive externalities to society as educated people are generally more cultured, logical, and reasonable, and are thus less likely to contribute to crime and social disorder. This paper discusses the issue that, since education is a merit good, the government should pay for education up to and including tertiary (university) education. While it is true that education is indeed a merit good and the first part of the statement is definitely true, it does not follow that the government should do more than merely subsidise education. In fact, governments should only provide or pay for public goods which are not produced by the free market, and since education is not a public good it should not be provided free.

Education as merit good – and the government should subsidise merit goods

It can be argued that a good that has positive externalities to society can be considered a merit good. An externality is a third party spill-over effect, or an effect that affects third parties not involved in the production and consumption of the good in question, and can be negative or positive. Positive externalities are positive third party spill-over effects. As people do not consider the positive externalities to society, but rather consider private benefits and private costs, they under-consume merit goods. The government can subsidise merit goods in order to boost their consumption, which is good for society.

Alternatively, a merit good can be thought of in terms of imperfect information – people do not have perfect information about the nature of the good, and thus they misjudge its merits and demerits. Hence, this leads also to the under-consumption of merit goods. The government by providing education at low cost (or even providing education free) can be seen as trying to mitigate this informational failure.

According to the diagram below, there is a divergence caused by the externality between the marginal social benefit (MSB) and the marginal private benefit (MPB), assuming that marginal social cost equals marginal private cost (MSC = MPC). Hence, clearly the government should directly subsidise merit goods, which would shift the MPB to the MSB. In this case, a subsidy here is a government payment directly to the consumer of education, which would shift the demand curve to the right. The famous economist Milton Friedman once suggested that an education voucher could be given to students, which would have the effect of shifting the MPB to the right to eliminate the externality. If, on the other hand, an indirect subsidy was given, meaning a subsidy was given to the producer of education, then the MSC curve would shift to the right.

Economics diagram - what diagram should be drawn here?

The Government Should Not Pay Entirely for Merit Goods

On the other hand, the government should not pay entirely for merit goods. Governments should pay for public goods which are non-rivalrous and non-excludable because public goods cannot be produced by the free market without government intervention, whereas merit goods can be produced by the free market. Non-rivalry is the condition that consumption of a good by one person does not reduce the amount of that same good for another person. Non-excludable is the condition that a consumer cannot be excluded from consuming a good. These two conditions lead to the situation where a free market does not produce public goods because of the free-rider problem and because the allocative efficient outcome leads to marginal cost being zero (MC = 0).

There are also other major issues on having free education, other than the fact that education is not a public good. First, there is the issue of opportunity cost. Opportunity cost is the cost of the next best alternative forgone. The problem is that if resources are devoted to making education free, then there are alternative uses for those resources that are forgone, such as national defence, healthcare, and infrastructural investments. Hence, subsidising education would make more economic sense rather than providing it entirely free. Second, the government is not the only possible provider of education – private agencies or public-private-partnerships (PPP) can also provide education. For instance, in many countries around the world, there are private agencies that provide education for profit.

Conclusions

In conclusion, while the government could possibly provide merit goods, such as education, for free in order to solve the market failure of positive externalities not being taken into account by individuals, and to overcome the informational failures associated with merit goods because people misperceive their benefits, there are other issues that need to be seriously considered like opportunity cost and alternative financing methods such as private provision with some government intervention and public-private-partnerships. However, in my opinion, the most important reason why governments should not provide merit goods is that they are not public goods which are not provided by the free market, and as such market-based policies should be used to encourage a higher consumption of education rather than direct government provision of education.

JC Economics Essays – Tutor's Commentary: This Economics paper was written under examination conditions by one of my former economics students, GSW. Putting yourself into your Economics tutor’s shoes, how would your Economics tutor make this essay even better? Hint: Any good Economics tutor would suggest using properly-labelled diagrams, with the curves moving to demonstrate a point, to make a good economics argument. Having said that, this economics site does not feature diagrams - so what else can be improved on, other than the usual "draw a diagram"? In fact, this economics essay is rather well written, and an excellent example of how a hardworking student from a humble background can learn and improve in his studies! This is a economics good paper. Yet, there are other approaches. How would YOU approach this question? Would you go for a more direct approach, or a more indirect approach, compared to this Economics answer? While I would not have answered this Economics question in this particular way, this approach is still workable and can be utilised to get a good grade in Economics examinations. Thank you for reading, and cheers. 

Evaluate the policies used by the Singapore government to correct imperfect information and the lack of mobility of the FOP? [15]

Evaluate the policies used by the Singapore government to correct these causes (imperfect information and lack of mobility of the factors of production/ resources) of market failure. [15]

Tutor's Quick Note: This is a continuation, part (b), of the previous question on this economics site.

There are many policies that the Singapore government can implement to correct market failure due to imperfect information and due to immobility of resources. This paper evaluates the Singapore government’s policies in correcting imperfect information and lack of resource mobility, and the evaluation here is whether these policies solve the underlying cause, causing the market failure, directly.

First, we examine subsidies for merit goods like subsidized healthcare, to compensate for consumers’ undervaluation of them and suppliers’ underproduction of them. Secondly, we also examine state intervention in the form of taxes to solve negative externalities. These two examinations address positive and negative externalities which are unknown or unconsidered by private consumers and producers and thus cause market failure.

Insert Economics diagram. Think: which diagram is relevant here? How would you explain it?

The economic answer is clear: increasing subsidies solves the problem of positive externalities being unacknowledged, while increasing taxes solves negative externalities. For instance, there are portions of the budget set aside for subsidized healthcare for senior citizens. Provision of food stamps and rations for low-income families, a wide umbrella of social services to provide free counseling for problem cases such as troubled teenagers, marital and family problems, and other services which private markets tend to fail in. These subsidies cost money, and perhaps that might be a problem, due to opportunity cost, which is the cost of the next best alternatives foregone. Yet, it is still possible to argue that using a cost benefit analysis the costs of the subsidies are worth it.

Furthermore, smoking, which is a demerit good, which has negative externalities, is heavily taxed in Singapore. These show that the Singapore government has done the right thing by removing distortions caused by people not taking externalities into account. The underlying causes indeed were taken into account.

Secondly, there can be the direct provision of information, for instance, with respect to smoking as well as insurance and unit trusts. The public often over-value demerit goods like cigarettes and tobacco, causing market failure as consumers overestimate the marginal benefits of it. The government thus runs a full series of anti-smoking campaigns trying to educate consumers such that they make informed decisions and are fully aware of health consequences in purchasing cigarettes. This does not fully correct market failure but mitigates it. Regarding cost-benefit analysis, this is viable due to the low costs of mass media campaigns but sustainable benefits of consumer knowledge. In Singapore, there is the Financial Advisers Act, under which independent advisory firms act as intermediaries between agents (insurance companies) and principals (consumers), acting to inform and educate consumers fully about insurance products from all insurance firms and providing proper product recommendation. This policy can correct market failure in the long run as many consumers are reliant on private insurance providers. However, it has its sustainable benefits as independent advisory advisers earn their remuneration from the portfolio growth of their clients, thus aligning their interests. Lack of information thus necessitates more information. Therefore, possibly the underlying causes were taken into account.

In Singapore, the most immobile form of capital is labour, which the government has targeted constantly. Capital flows are all flexible in Singapore, as from the beginning we have had a focus on external MNCs and foreign direct investment. We focus here on labour. Has the government done a good job here?

The government can solve the problem of immobility of factors of production: first, job matching and training schemes to link up supply and demand forces in the labour market. Colleges have job centers to facilitate the process in which graduates get their credentials matched to suitable jobs. Similar job matching centers under the National Trades Union Centre (NTUC) are widely available, all measures to improve structural rigidities, to reduce time-lags in factors of employment is responding to market demands. Perhaps the only criticism might be in terms of costs of training and opportunity costs. The underlying economic causes were taken into account. Increasing information and increasing training solve frictional unemployment and structural unemployment and hence reduce immobility of labour greatly.

Regarding trade union pressures, all agents representing workers’ benefits come under the NTUC, which tries to incorporate employee and firm interests, aligning them to national interests. Politicking at workplaces and lobbying are actively stopped by the Singapore government. This is a measure that only works for Singapore, in which political power is centralized and the state can intervene. Singapore’s uniqueness works in its favour here.

However, for other countries with many federal states, lobbying and union pressure is still abundant, which proactively try to manipulate prices and market systems for their own interests. Hence it might be only possible for Singapore to use the internationally famous tripartite method of solving immobility of labour.

In conclusion, Singapore has many heavy duty weapons in its arsenal for reducing imperfect information and immobility of labour. However, any policy used must be checked for its effectiveness in solving the underlying problems that cause the market failure.

JC ECONOMICS ESSAYS Tutor's Comments: This was written by a former Economics student of mine (from MJC) under examination conditions. I would not have approached this economics question this way; however this quite skilfully written economics paper is very good and very clear. Do, however, ask yourself a few questions. How would you have written it, to address the question? How would you have improved on it? There are many other ways to approach this question that would have also adequately addressed its specialised requirements. Do remember to think of how you can learn from this Economics essay. Thank you for reading and cheers. 

Explain carefully why imperfect information and the immobility of the factors of production may lead to market failure. [10]

Explain carefully why imperfect information and the immobility of the factors of production may lead to market failure. [10]

Market failure can be defined as the failure of the free market mechanism to provide goods in a socially optimal and thus efficient manner, and is usually attributed to imperfect markets, the existence of externalities, the lack of provision of public goods, and inequity. Imperfect information and immobility of the factors of production also lead to market failure, because they directly contradict the assumptions of the free market system. The two main assumptions violated are firstly that all participants have perfect information, and secondly that the factors of production are mobile, such that they can respond to changing prices which function as a signal for producers to move resources into various areas of production. With those assumptions violated, Pareto optimality - when one person cannot be made better off without making someone else worse off - cannot be derived from perfect competition in a free market. This paper explains carefully why imperfect information and the immobility of the factors of production lead to market failure.

The free market system assumes that consumers have perfect knowledge of costs and benefits, thus the market-clearing equilibrium is able to be reached when individuals’ valuation of the good equal suppliers’ marginal cost of production; hence demand = supply. But in reality, consumers are often ignorant about the quality of the goods and durables they purchase. These are cases of imperfect information, which cause market failure as individuals are unable to fully obtain the marginal benefits of the good. As the market demand curve is derived by summing up all individual demand curves an optimal market equilibrium cannot be derived. On the supply side, firms are often ignorant of market opportunities, prices and costs, and may often make inaccurate estimations of market consumer demand or fail to respond promptly to demand changes due to errors in judgment. Thus market failure occurs.

Imperfect information is present when consumers and producers do not or are unable to consider society’s benefits and society’s costs, as reflected in the diagrams below.

Insert Economics diagrams here: HINT, draw externality diagrams. Why externality diagrams?

In the first diagram, there is an overproduction of a good distorting the market. Negative externalities, if unknown to producers, or if they merely consider their own private costs benefits and ignore society’s efficiency, also result in market failure, but this time in overproduction of a good.

In the second, there is an underproduction distorting the market. Consumers often have lower than optimal demand for desirable public goods, for example healthcare and education, as they only take into account current utilities, failing to judge the full extent of welfare and benefits the good delivers to society. This presence of unacknowledged positive negative externalities results in the underproduction of the good. Hence, the failure to acknowledge externalities is a lack of full or perfect information that distorts the market.

For private markets to function efficiently, factors such as labor and capital must be able to move freely. If factors are immobile, due to perhaps occupational rigidities and inefficient job seeking processes and bureaucratic issues, it affects the supply of these knowledge-based products. This immobility can lead to the wrong price signals and inefficient allocation of resources to these industries. For the socially optimal equilibrium to be reached, firms and labor must respond to market signals. When firms have trade unions as stakeholders, markets tend to fail as unions tend to aggressively seek minimum wage rates or protect their wage benefits or restrict entry of new labor, even in the face of declining market demand.

Hence, both imperfect information and lack of mobility of resources affect the workings of the price mechanism in the free market, and because perfect competition fails, then there is market failure, and the Pareto efficiency promised by perfect competition in the free market does not arise.

JC ECONOMICS ESSAYS - Tutor's Comments: This Economics essay is rather well written and addresses the issue of market failure well. There are many good aspects to learn about it. However, it was not written by an "A" level student but was written by a trainee teacher (trainee tutor) from education school. Perhaps, as improvement, the author should have also compared and contrasted asymmetric information with imperfect information. For more information on asymmetric information, see George Akerlof and Michael Spence (for further advanced Economics readings).