Glamor Economics

Chapter 18

Chapter 3 Section 5 Side Effects of Absolute Freedom - Market Failure

In the eyes of many Western economists, a completely free market economy is the most perfect adjustment mechanism.However, absolute perfection does not exist.The "invisible hand" of the market also has its own insurmountable weaknesses and weaknesses, which are represented by the concept of market failure in economics.

1929～1932年经济大危机就是一次典型的市场失灵。1933年，整个资本主义世界工业生产下降40%，各国工业产量倒退到19世纪末的水平，世界贸易总额减少2/3，美、德、法、英共有29万家企业破产。

The economic crisis that occurred in the late 20s announced the end of the "market myth" of classical economics, and the economic term "market failure" was widely used in the field of western economics.The main factors leading to market failure are: externalities, public goods, and unequal income distribution.

1. The market cannot maintain the comprehensive balance and stable and coordinated development of the economy

The economic equilibrium achieved by market regulation is a kind of equilibrium that is adjusted afterwards and completed through decentralized decision-making. It often has a considerable degree of spontaneity and blindness, resulting in periodic economic fluctuations and imbalances in economic aggregates.In addition, individual rational choices in a market economy can effectively regulate the relationship between supply and demand in individual industries and individual markets, but the combined effect of individual rational choices may lead to collective irrational behavior.For example, when inflation occurs, rational individuals will naturally make a rational choice—increase spending to buy goods, and the effect of this is the collective irrational choice—maintain or even aggravate inflation; similarly, when the economy is depressed , will also lead to collective irrational behavior due to the rational choice of each individual - to reduce expenditure - to maintain or even aggravate the economic depression.In the fierce competition, in order to seek the maximum profit, market players often invest funds in industries with short cycles, quick returns and low risks, resulting in an irrational industrial structure.

2. Laissez-faire market competition will eventually lead to monopoly

Because the marginal cost of production determines the market price, the level of production cost puts market players in different positions in the market competition, which in turn leads to some enterprises in a favorable situation gradually occupying a monopoly position.At the same time, in order to obtain economies of scale, some market players often form a monopoly on the market through alliances, mergers, and mergers, which leads to distortions in the market competition mechanism.

3. Market mechanisms cannot compensate and correct economic externalities

The external effect is an objective existence independent of the market mechanism. It cannot be automatically weakened or eliminated through the market mechanism, and often needs to be corrected and compensated by forces outside the market mechanism.Obviously, economic externalities mean that some market entities can obtain external economies without compensation, while some parties cannot get compensation for the losses caused by external diseconomies.The former is often seen in the "free rider" phenomenon in economic life, that is, consuming public goods such as public education, public infrastructure, and national defense construction without sharing the cost; The predatory exploitation of resources and the serious damage to the ecological environment bear the cost.

4. The market mechanism is unable to organize and realize the supply of public goods
The so-called public goods refer to those products and services that can be shared by many people at the same time, and the cost of supplying it and the effect of enjoying it do not change with the number of people using it, such as public facilities, environmental protection, Culture, science, education, medicine, health, diplomacy, national defense, etc.One person's consumption of public goods will not lead to the reduction of other people's products. As long as there are public goods, everyone can consume them.On the one hand, the supply of public goods requires costs, which should be shared by beneficiaries; It is impossible to exclude consumers who do not pay for it, so the economic externalities as mentioned above and the resulting "free riders" will inevitably occur.What's more serious is that everyone hopes that others will provide public goods and enjoy the benefits themselves. As a result, it is very likely that no one will provide public goods.

5. The market distribution mechanism will result in unfair income distribution and polarization between the rich and the poor

Generally speaking, the market can promote the improvement of economic efficiency and the development of productivity, but it cannot automatically bring about a balanced and fair social distribution structure.The market allocation mechanism that pursues the principle of equal value exchange and fair competition is due to the unbalanced development of each region, each department (industry), and each unit, as well as the differences in each person's natural endowment, education quality, and social conditions. The difference between the two produces de facto inequality; and the law of competition often has the Matthew effect that the strong get stronger and the weak get weaker, and wealth becomes more and more concentrated, resulting in income gaps between the rich and the poor, and between developed and backward regions. getting bigger.

Due to the existence of market failure, to optimize the allocation of resources, the government must intervene or regulate.The combination of market rules and government regulation can effectively curb market failures.

[links to related words]

Asymmetric information Because the information owned by the participants in economic activities is different, some people can take advantage of information to conduct fraud, which will damage legitimate transactions.When people's fear of fraud seriously affects trading activities, the normal function of the market will be lost, and the market's function of allocating resources will also fail.In order to ensure the normal operation of the market, the government needs to formulate some regulations to restrain and stop fraud.

(End of this chapter)