In ideology at the root of all

In this essay, I
will be explaining the limitations of the free market using examples of
different forms of market failure to illustrate my answers. The free market is not all that bad because it
allows individuals have the freedom to be innovative. “Neoliberalism is the
ideology at the root of all our problems”. (Montbiot, G. 15th April 2016 – The Guardian) This means that neoliberalism is a system that’s is in the
favour of supporting a free market ideology.
It’s used to transform the state from a provider of public welfare to a
promoter of markets, where competition comes in place to make this change
happen. (Paul
Wetherly & Dorron Otter; 2014, Page 463)

An economy run by businesses have no
government regulation or intervention. This means that the prices are
determined by unrestricted competition between privately owned businesses. (Paul Wetherly & Dorron Otter; 2014, Page 460) This is a
free market and some of the countries that have this are America, Switzerland, New
Zealand, Australia,
Singapore and Hong Kong. Market
failure happens when the allocation of goods and services is not efficient
because of the price mechanism. This is when government support and control
will be necessary to put them back on track and help them avoid failure in the
future. (Paul
Wetherly & Dorron Otter; 2014, Page 462)

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In a free
market with restricted government control, you will get low benefits, poor
health services and underfunded schools. This sort of economy will bring
unfairness where business owners will be more into profit than equality. For example, if you start life with very little,
and do not even get a good education, then there will be very little protection
from poverty.

Public
goods cannot be provided privately because of their two characteristics, non-rivalrous
and non-excludable. Non-excludable is when suppliers cannot restrict supply to
those consumers who have paid for it. Street lighting is a good example because
those in the area who are passing by will benefit and no has the right to deny
access. Non-rivalrous means that when a good is consumed it does not reduce the
amount available to others. For example,
individuals do not need to queue to get access to street lighting. (David Begg & Damian Ward; 2013, Page 436)

Another problem in market failure is the
free rider that occurs when people take advantage of being able to use a common
resource. Markets fail in the existence of pure public goods because of this so-called free rider. Pure public goods are defined as a good or service that provides
non-excludable and non-rival benefits to all people in the population.
Providing a public good is, of course, is going to be costly but in the end its
valuable. This so that everyone can benefit from it no matter whether he or she has
contributed to its financing. There is
also that individual who avoid paying for
the good in hoping that others will
provide. These people are called self-interested
individuals.

If the free market had positive
prices it would not profitable meaning that all goods should be provided free
of charge. An example would be a bridge which is provided by a private firm.
The firm will charge a fee that will cover the costs of building the bridge,
alongside this the firm can also earn a profit.
Once the bridge has been built, the most efficient outcome occurs at the point
where the social marginal costs and marginal benefit curves intersect. The
marginal social cost it the total cost society pays for the production of
another unit or investing money into the economy. A marginal benefit is an additional satisfaction that a person
receives from using an extra part of a good or service. Since the marginal
curve of a bridge is virtually zero for all additional crossings up to the
point of traffic congestion, the price charged should be zero. Obviously, no
private firms will be prepared to build
the bridge without charging a toll for all journeys. (Dermot McAleese: 2004, Page 192)

 

Monopoly power is
defined as a single seller selling a
unique product and its one of the forms of market failure. There are many types of monopoly power: pure monopoly is a market
structure of one firm that is dominating the entire market which is a member.
Also, protected from competition by significant barriers to
entry such as London underground.

Working monopoly is a firm with at least 25% of the market such as Tesco.
Oligopoly is a firm that is dominating the market such as Costa or Starbucks in
the coffee industry. Duopoly is 2 firms dominating the market such as Coke and
Pepsi in the fizzy drinks industry. (Geoff Riley; 23 Apr 2016,
Youtube)

To illustrate unregulated monopoly with an economic profit, the price is represented by the demand
or average revenue curve. It must exceed the average total cost curve at MR = MC
level of output. Demand is downward sloping for the monopolists since it represents the entire industry demand. The marginal revenue curve is also is downward
sloping but that’s the demand curve. The monopolist
will produce in the elastic region of its demand curve. In this region, marginal
revenue is greater than 0. This graph shows the area of economic profit.

There are many that have been conquered by firms with a high degree of monopoly power, there will be a
chance of consumers, suppliers and employees
being mistreated. Also, there could be a someone
using or expending something of value carelessly,
or damaging the environment from the use of resources as firms seek to minimize direct
costs. Nowadays, you can often attain monopoly
power by using unfair
anti-competitive practices meaning that businesses, government or religious practices that prevent or reduce competition in
a market. However, sometimes there are industries in which the most efficient
scale of organisation would be to have just one or a few large companies.  (Paul
Wetherly & Dorron Otter; 2014, Page 46)

Monopolies exist in a free market because the free market promotes it. The monopolies may sometimes appear in the
competitive market process which has a large number of firms producing identical
products. In a free market, monopolies appear for two reasons: one is when
a business pushes their competition from
the market by using techniques like being
more effective or provide a better product,
Second is when an entrepreneur is the
first to offer a new product.

When the monopoly persists it
means that the provider is more efficient
or more innovative than its rivals. When government
protects businesses from competition or sponsors costs the efficiency and
innovation suffer. Monopoly doesn’t last long but if it does then it’s not really bad. (Sandy Ikeda; Friday 25th October 2013, FEE)

Businesses
that run for money always wish to maximise profit but in reality, some may be inadequate and so not use
resources in the best or most favourable way. This means that they will not
produce at the lowest point on their average cost curves. Consumers want
satisfaction or the usefulness they derive from their purchases, they may at
times mistakenly buy the wrong products. If sufficient people make such
mistakes then the resources will be wasted from their finest. (Neil Harris; 2001, Page 185/186)

When businesses do
their market research and end up with imperfect information, the results will
be wrong decisions and inefficiency. This also causes less than the highest
standard or quality resources to be distributed. Imperfect
information is caused by all buyers and sellers not having access to all the
sources of information. When competing with others becomes difficult it is
caused by businesses not knowing each other’s
costs, or pricing policies, or profit levels or business plans.

They will be then tempted to make or
become more different into new products or markets which actually does not do
so well. They will end up finding that this decision made was a failure and
cannot do anything about it because it will be too late for them. Being unaware
of potential opportunities is the result of all this. Buyers are not always
knowledgeable about prices of goods in every retail outlet even if the stores
are close by.

Not everyone is really technical or hands-on person so they won’t have details on machinal problems if they buy a second-hand car
or other technical programming information. Personally,
I discover problems after purchasing and it happens mostly to everyone, which
is why the consumer associations are so popular. They intervene in situations
like this and provide as much of this type of information as possible.

The way this economy works is that
advertising is done to persuade customers to purchase but the benefit of this
method is having the buyer to ignore information which could vital. For
example, smoking is bad for you but in the advertising there no mention of
this. If such information was put on then buyers would give up. (Neil Harris; 2001, Page 186)

There are positive
and negative externalities which exist. Externalities is a third party effect arising from production and consumption
of goods and services for which no appropriate compensation is paid. (Externalities; 2018 | tutor2u Economics) If an
economy experiences either a positive or negative externality, the free market
is not the best option. In the free market, very often there will be parties
who will experience costs or reap gains that they did not choose to.

A simple example
would if your neighbour decides to throw a huge party. There is a possibility of
noise disturbances in your neighbourhood which is a negative externality unless you and the other neighbours
actually like the music. In the free market sense, he has paid for the beer,
the DJ and other things also he has paid that is required of him to be able to
throw the party.  The party is thrown at
the expense of you and the other surrounding neighbours. The neighbourhood
isn’t a way for you to maximize total profit.
In other words, the net benefit which is the benefit received from paying less
for a good than the maximum amount that the person is willing to pay for it, of
the neighbourhood is not being maximized. In this case, if a social planner
stepped in and made the noisy neighbour compensate the rest of the
neighbourhood either through free drinks
or a payment of some sort for the costs that they experience, the entire
neighbourhood moves closer towards the finest
point.

To demonstrate the
efficiency loss from spillover effects a
chemical plant will be best suited. This is an
example of another negative externality. A chemical plant channels all
its polluted wastes into the nearest river because it cost effective, easy and
quick. If there was a factory across which needed clean water for whatever use,
it would have to purchase clean water from somewhere which would result in a loss
of profit. This is another limitation of having a free market because the government
would come in and shut down the chemical plant. (Dermot
McAleese; 2004, Page 188/189)

Another cause of market failure is merit goods. Merit goods
are those goods and services that the government feels that people will
under-consume. These goods and services are supported and provided for free at
the point of use so that the use of them does not primarily depend on the ability
to pay for the goods and service. The state is concerned to increase or
maximise the consumption of certain good which it considers to be highly
desirable for the welfare of the citizens. Such goods are described as merit
goods and the best-known examples are the
public health and education services. Other examples include training,
insurance, inoculation and seat belts in a pure market system private spending
on merit goods and services would be determined by the private benefits derived
from them. Merit goods usually have a positive externality so that the social
benefits derived from them. Merit goods usually have positive externalities so that the social benefits derived from
consuming them exceed the private benefits. Most economists argue that the
state intervention is necessary in the case of merit goods to ensure a greater
provision of these goods and services that
would be supplied under the operation of the price mechanism in free markets. (G F Stanlake & S J Grant; 1995, Page 222)

There is another side of merit goods which is demerit goods.
Demerit good is a good or service whose consumption is considered unhealthy or corrupting
such as cigarettes and another certain form
of drugs. Some individuals have no knowledge about the true costs of consuming
them which includes negative externalities.

This is why these goods are over provided by the market
mechanism. Which will not in a free market
because the government can ban their harmful effects. This will eventually
lessen the selling of these goods. (G F Stanlake &
S J Grant; 1995, Page 221/222)

Short-termism is another cause of
market failure. Its main focus is on
short-term projects or objectives for immediate profit at the expense of
long-term security. This means that short-termism
arises when a business prioritises short-term rather than long-term
performance. Private sector entrepreneurs often have short-term objectives at the expense of long planning. This can
result in overproduction of consumers
goods and underproduction of capital goods but will fail in developing new of production and new products. “In April 1994 a
Gallup survey of 501 medium-size firms found
that 79 percent of entrepreneurs blame short-termism by the city for the UK’s
industrial decline and 69 percent also
blamed short-termism by management.” (G F Stanlake & S J Grant; 1995, Page 224)

The conclusions to the
Monbiot’s quote is, I’ve been reading, researching and evaluating about the
concept and the more I read the more understanding I am getting, in thinking that
neoliberalism is losing its analytical edge. This is because In a free market with restricted
government control, you will get low benefits, poor health services and
underfunded schools. This sort of economy will bring unfairness where business
owners will be more into profit than equality. For example, if you start life with very little, and do not even get a
good education, then there will be very little protection from poverty. Another example, In the UK there is a high demand for mobile phones as they are very popular. The
fact that the UK has a free market, entrepreneurs use this to an advantage as
they know that mobile phones are high in demand and the UK will allow them to
sells mobile phones under a free market which benefits them in many ways. This
is causing government failure and falling the state of the market even more.
Market failure is what triggering all this. Forms of market failure are monopoly power, information failure, public
goods, merit goods, demerit goods, short-termism,
externalities and a lot more. The two major ones are monopoly power because
markets could become uncompetitive and information failure duty to lack of
information. When the government starts to intervene to sort out problems that
occur in the markets, free market firms will not like the decisions that are
made by them. The government are more
likely to anticipate and predict problems in the market because they have more
money, not bound by competition and have more knowledge. Overall, state
intervention is likely to succeed in an equality economy because they have more
power in taking down the free market system who will be left to defend themselves.   

In this essay, I
will be explaining the limitations of the free market using examples of
different forms of market failure to illustrate my answers. The free market is not all that bad because it
allows individuals have the freedom to be innovative. “Neoliberalism is the
ideology at the root of all our problems”. (Montbiot, G. 15th April 2016 – The Guardian) This means that neoliberalism is a system that’s is in the
favour of supporting a free market ideology.
It’s used to transform the state from a provider of public welfare to a
promoter of markets, where competition comes in place to make this change
happen. (Paul
Wetherly & Dorron Otter; 2014, Page 463)

An economy run by businesses have no
government regulation or intervention. This means that the prices are
determined by unrestricted competition between privately owned businesses. (Paul Wetherly & Dorron Otter; 2014, Page 460) This is a
free market and some of the countries that have this are America, Switzerland, New
Zealand, Australia,
Singapore and Hong Kong. Market
failure happens when the allocation of goods and services is not efficient
because of the price mechanism. This is when government support and control
will be necessary to put them back on track and help them avoid failure in the
future. (Paul
Wetherly & Dorron Otter; 2014, Page 462)

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For You For Only $13.90/page!


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In a free
market with restricted government control, you will get low benefits, poor
health services and underfunded schools. This sort of economy will bring
unfairness where business owners will be more into profit than equality. For example, if you start life with very little,
and do not even get a good education, then there will be very little protection
from poverty.

Public
goods cannot be provided privately because of their two characteristics, non-rivalrous
and non-excludable. Non-excludable is when suppliers cannot restrict supply to
those consumers who have paid for it. Street lighting is a good example because
those in the area who are passing by will benefit and no has the right to deny
access. Non-rivalrous means that when a good is consumed it does not reduce the
amount available to others. For example,
individuals do not need to queue to get access to street lighting. (David Begg & Damian Ward; 2013, Page 436)

Another problem in market failure is the
free rider that occurs when people take advantage of being able to use a common
resource. Markets fail in the existence of pure public goods because of this so-called free rider. Pure public goods are defined as a good or service that provides
non-excludable and non-rival benefits to all people in the population.
Providing a public good is, of course, is going to be costly but in the end its
valuable. This so that everyone can benefit from it no matter whether he or she has
contributed to its financing. There is
also that individual who avoid paying for
the good in hoping that others will
provide. These people are called self-interested
individuals.

If the free market had positive
prices it would not profitable meaning that all goods should be provided free
of charge. An example would be a bridge which is provided by a private firm.
The firm will charge a fee that will cover the costs of building the bridge,
alongside this the firm can also earn a profit.
Once the bridge has been built, the most efficient outcome occurs at the point
where the social marginal costs and marginal benefit curves intersect. The
marginal social cost it the total cost society pays for the production of
another unit or investing money into the economy. A marginal benefit is an additional satisfaction that a person
receives from using an extra part of a good or service. Since the marginal
curve of a bridge is virtually zero for all additional crossings up to the
point of traffic congestion, the price charged should be zero. Obviously, no
private firms will be prepared to build
the bridge without charging a toll for all journeys. (Dermot McAleese: 2004, Page 192)

 

Monopoly power is
defined as a single seller selling a
unique product and its one of the forms of market failure. There are many types of monopoly power: pure monopoly is a market
structure of one firm that is dominating the entire market which is a member.
Also, protected from competition by significant barriers to
entry such as London underground.

Working monopoly is a firm with at least 25% of the market such as Tesco.
Oligopoly is a firm that is dominating the market such as Costa or Starbucks in
the coffee industry. Duopoly is 2 firms dominating the market such as Coke and
Pepsi in the fizzy drinks industry. (Geoff Riley; 23 Apr 2016,
Youtube)

To illustrate unregulated monopoly with an economic profit, the price is represented by the demand
or average revenue curve. It must exceed the average total cost curve at MR = MC
level of output. Demand is downward sloping for the monopolists since it represents the entire industry demand. The marginal revenue curve is also is downward
sloping but that’s the demand curve. The monopolist
will produce in the elastic region of its demand curve. In this region, marginal
revenue is greater than 0. This graph shows the area of economic profit.

There are many that have been conquered by firms with a high degree of monopoly power, there will be a
chance of consumers, suppliers and employees
being mistreated. Also, there could be a someone
using or expending something of value carelessly,
or damaging the environment from the use of resources as firms seek to minimize direct
costs. Nowadays, you can often attain monopoly
power by using unfair
anti-competitive practices meaning that businesses, government or religious practices that prevent or reduce competition in
a market. However, sometimes there are industries in which the most efficient
scale of organisation would be to have just one or a few large companies.  (Paul
Wetherly & Dorron Otter; 2014, Page 46)

Monopolies exist in a free market because the free market promotes it. The monopolies may sometimes appear in the
competitive market process which has a large number of firms producing identical
products. In a free market, monopolies appear for two reasons: one is when
a business pushes their competition from
the market by using techniques like being
more effective or provide a better product,
Second is when an entrepreneur is the
first to offer a new product.

When the monopoly persists it
means that the provider is more efficient
or more innovative than its rivals. When government
protects businesses from competition or sponsors costs the efficiency and
innovation suffer. Monopoly doesn’t last long but if it does then it’s not really bad. (Sandy Ikeda; Friday 25th October 2013, FEE)

Businesses
that run for money always wish to maximise profit but in reality, some may be inadequate and so not use
resources in the best or most favourable way. This means that they will not
produce at the lowest point on their average cost curves. Consumers want
satisfaction or the usefulness they derive from their purchases, they may at
times mistakenly buy the wrong products. If sufficient people make such
mistakes then the resources will be wasted from their finest. (Neil Harris; 2001, Page 185/186)

When businesses do
their market research and end up with imperfect information, the results will
be wrong decisions and inefficiency. This also causes less than the highest
standard or quality resources to be distributed. Imperfect
information is caused by all buyers and sellers not having access to all the
sources of information. When competing with others becomes difficult it is
caused by businesses not knowing each other’s
costs, or pricing policies, or profit levels or business plans.

They will be then tempted to make or
become more different into new products or markets which actually does not do
so well. They will end up finding that this decision made was a failure and
cannot do anything about it because it will be too late for them. Being unaware
of potential opportunities is the result of all this. Buyers are not always
knowledgeable about prices of goods in every retail outlet even if the stores
are close by.

Not everyone is really technical or hands-on person so they won’t have details on machinal problems if they buy a second-hand car
or other technical programming information. Personally,
I discover problems after purchasing and it happens mostly to everyone, which
is why the consumer associations are so popular. They intervene in situations
like this and provide as much of this type of information as possible.

The way this economy works is that
advertising is done to persuade customers to purchase but the benefit of this
method is having the buyer to ignore information which could vital. For
example, smoking is bad for you but in the advertising there no mention of
this. If such information was put on then buyers would give up. (Neil Harris; 2001, Page 186)

There are positive
and negative externalities which exist. Externalities is a third party effect arising from production and consumption
of goods and services for which no appropriate compensation is paid. (Externalities; 2018 | tutor2u Economics) If an
economy experiences either a positive or negative externality, the free market
is not the best option. In the free market, very often there will be parties
who will experience costs or reap gains that they did not choose to.

A simple example
would if your neighbour decides to throw a huge party. There is a possibility of
noise disturbances in your neighbourhood which is a negative externality unless you and the other neighbours
actually like the music. In the free market sense, he has paid for the beer,
the DJ and other things also he has paid that is required of him to be able to
throw the party.  The party is thrown at
the expense of you and the other surrounding neighbours. The neighbourhood
isn’t a way for you to maximize total profit.
In other words, the net benefit which is the benefit received from paying less
for a good than the maximum amount that the person is willing to pay for it, of
the neighbourhood is not being maximized. In this case, if a social planner
stepped in and made the noisy neighbour compensate the rest of the
neighbourhood either through free drinks
or a payment of some sort for the costs that they experience, the entire
neighbourhood moves closer towards the finest
point.

To demonstrate the
efficiency loss from spillover effects a
chemical plant will be best suited. This is an
example of another negative externality. A chemical plant channels all
its polluted wastes into the nearest river because it cost effective, easy and
quick. If there was a factory across which needed clean water for whatever use,
it would have to purchase clean water from somewhere which would result in a loss
of profit. This is another limitation of having a free market because the government
would come in and shut down the chemical plant. (Dermot
McAleese; 2004, Page 188/189)

Another cause of market failure is merit goods. Merit goods
are those goods and services that the government feels that people will
under-consume. These goods and services are supported and provided for free at
the point of use so that the use of them does not primarily depend on the ability
to pay for the goods and service. The state is concerned to increase or
maximise the consumption of certain good which it considers to be highly
desirable for the welfare of the citizens. Such goods are described as merit
goods and the best-known examples are the
public health and education services. Other examples include training,
insurance, inoculation and seat belts in a pure market system private spending
on merit goods and services would be determined by the private benefits derived
from them. Merit goods usually have a positive externality so that the social
benefits derived from them. Merit goods usually have positive externalities so that the social benefits derived from
consuming them exceed the private benefits. Most economists argue that the
state intervention is necessary in the case of merit goods to ensure a greater
provision of these goods and services that
would be supplied under the operation of the price mechanism in free markets. (G F Stanlake & S J Grant; 1995, Page 222)

There is another side of merit goods which is demerit goods.
Demerit good is a good or service whose consumption is considered unhealthy or corrupting
such as cigarettes and another certain form
of drugs. Some individuals have no knowledge about the true costs of consuming
them which includes negative externalities.

This is why these goods are over provided by the market
mechanism. Which will not in a free market
because the government can ban their harmful effects. This will eventually
lessen the selling of these goods. (G F Stanlake &
S J Grant; 1995, Page 221/222)

Short-termism is another cause of
market failure. Its main focus is on
short-term projects or objectives for immediate profit at the expense of
long-term security. This means that short-termism
arises when a business prioritises short-term rather than long-term
performance. Private sector entrepreneurs often have short-term objectives at the expense of long planning. This can
result in overproduction of consumers
goods and underproduction of capital goods but will fail in developing new of production and new products. “In April 1994 a
Gallup survey of 501 medium-size firms found
that 79 percent of entrepreneurs blame short-termism by the city for the UK’s
industrial decline and 69 percent also
blamed short-termism by management.” (G F Stanlake & S J Grant; 1995, Page 224)

The conclusions to the
Monbiot’s quote is, I’ve been reading, researching and evaluating about the
concept and the more I read the more understanding I am getting, in thinking that
neoliberalism is losing its analytical edge. This is because In a free market with restricted
government control, you will get low benefits, poor health services and
underfunded schools. This sort of economy will bring unfairness where business
owners will be more into profit than equality. For example, if you start life with very little, and do not even get a
good education, then there will be very little protection from poverty. Another example, In the UK there is a high demand for mobile phones as they are very popular. The
fact that the UK has a free market, entrepreneurs use this to an advantage as
they know that mobile phones are high in demand and the UK will allow them to
sells mobile phones under a free market which benefits them in many ways. This
is causing government failure and falling the state of the market even more.
Market failure is what triggering all this. Forms of market failure are monopoly power, information failure, public
goods, merit goods, demerit goods, short-termism,
externalities and a lot more. The two major ones are monopoly power because
markets could become uncompetitive and information failure duty to lack of
information. When the government starts to intervene to sort out problems that
occur in the markets, free market firms will not like the decisions that are
made by them. The government are more
likely to anticipate and predict problems in the market because they have more
money, not bound by competition and have more knowledge. Overall, state
intervention is likely to succeed in an equality economy because they have more
power in taking down the free market system who will be left to defend themselves.   

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