Market Failures When adequate competition does not exist. In an age where mergers are all too common, the result has been an increase in larger and fewer firms in many industries. In extreme cases, this results in a monopoly. The greatest threat that a monopoly poses is that it denies consumers the benefit of choice and competition. Because a monopoly occupies the top spot in its market, it can use its position to impede competition and restrict production. Thus in the end there are artificial shortages and higher prices. Inadequate competition may also enable a firm to influence politics by means of economic strength. In the past there have been executives who furthered the political careers of those closest to them. Though it is not necessary for a business to be a monopoly in order to influence politics, it certainly helps. A large corporation may simply want tax brakes on a state or local level. If the government refuses, then the plant may threaten to moves its facilities elsewhere. Because the government does not want an economic loss to its area, it may acquiesce to the demands of the corporation. In order to efficiently allocate resources, consumers, business people, and government officials must have adequate information about market conditions . Some of which is easy to obtain like sales prices or want ads. Yet there is a little more difficulty in ascertaining information about a companies earnings and dividends.

Inadequate Competition Dangers of monopolies- it denies consumers the benefit of competition. People cannot depend on the free market system to allocate resources efficiently, or to bring the greatest satisfaction Political Power- inadequate competition may enable a business to influence politics – i.e., tax breaks

Externalities an economic side effect that either benefits are harms a third party not directly involved in the activity can cause market failure if the price mechanism does not take into account the full social costs and social benefits of production and consumption. SOCIAL COST = PRIVATE COST + EXTERNALITY Examples: * A smoker annoys others with second hand smoke. * A gardener delights a neighbour with his beautiful garden. * A pulp mill pollutes the air and water in town. * A perfume wearer gives a friend an allergic reaction.

Externalities Negative Externality: harmful side effect that affects an uninvolved third party (ex. new airport in your neighborhood) producers don't take responsibility for external costs that exist--these are passed on to society. Positive Externality: beneficial side effect that affects an uninvolved third party ( ex. airport generates more jobs) Keeping your yard well maintained helps your house's value and also helps the value of your neighbors' homes. A free market tends to over-produce the good which produces a negative externality, and under produce those with positive externality. Negative externalities result in a lower free-market output. In order to make the market produce the optimal amount, we must impose a tax. This is called "internalizing the externality", and forces those involved to account for external costs. There are also externalities in "consumption", when consumption has costs for persons other than those actually consuming the product. Examples of these are cigarettes and second-hand smoke, and drinking alcohol and car accidents. Not all externalities are negative. Some create benefits to those not directly involved. Such is the case with "technology spillover", where new inventions benefit those beyond the inventors. Some have argued that governments should subsidize research and development, since it will have positive externalities to everyone else. Another method is to allow patents to give monopoly rights to new inventions for a period of time, and encourage such activity. Without this method, there could be an under investment in research. Positive externalities in production means that social cost is less than private cost, and more of the good should be produced than will occur in a free market. There may also be positive externalities in consumption, such as education. In this case, the social value is greater than the private value

Negative Externalities of the Oil Spill * millions of dollars lost due to production of shrimps, fish and other fish products by the fishers * the lost income derived from the billion dollar tourism industry of Louisiana if the gulf oil spill continues * cost of wildlife and wildlife breeding grounds lost due to the oil spill * increased cost of oil prices due to the moratorium on deep water drilling operations * lost jobs due to the suspension of deep water drilling operations * health costs of cleanup workers in the frontline * cost of air pollution that will pose respiratory related ailments Positive Externalities of the Oil Spill * millions of feet of boomers were employed to prevent oil from spreading uncontrollably. Boomer production means increased income for the manufacturers of this material. * millions of dollars were spent on dispersants that benefitted the producers of this chemical * thousands of kiddie scoopers were sold at $2 each benefiting the manufacturers * there is an increased demand for respirators. This means increased income to producers of this device. * 30,000 cleanup workers were hired * 200 portable toilets were rented at $200,000 a month increasing income of providers more than three times * small four-bedroom houses near the location of the oil spill were rented at $45,000 per month at the lowest * hotels in the gulf area are fully booked for six months which means increased income * $360 million for a project to build six sand berms meant to protect Louisiana’s wetlands from spreading oil * income derived from production of technologies to cap like robots and capping domes, etc.