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Market Failure

 

             The market can be very beneficial to an economy but sometimes it does not work. Market failure is not an outcome of when prices rise or fall. Market failure may occur when one firm controls the market and restricts the quantity it produces; when producers fail to take into account all the costs of production; or when the good being produced can be consumed by everyone without paying for it. The market does not always work efficiently so sometimes government action is necessary to overcome market failure and lead to a more efficient use of resources.
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             Marginal analysis, which compares the marginal cost of an activity (the added cost from making a small change) to the activity's marginal benefit (the additional benefit from the small change), is how decisions are made. If the marginal benefit exceeds the marginal cost, the activity is undertaken and if it is short of the marginal cost, the activity is not undertaken. Changes in the opportunity cost (the marginal cost), or in the marginal benefit of an activity, change the incentives and change the decision made. Voluntary exchange makes both buyers and sellers better off. This allows markets to practice efficient ways in organizing exchange. .
             People engage in voluntary exchange only if they expect the exchange to make them better off, so everyone gains from voluntary exchange. Most exchange in our economy takes place in markets. Markets are efficient because they send resources to the place where they are most highly valued; however, sometime the market does not work. Market exchanges should be reciprocal, as both parties should get products of equal value.
             In general, the market allocates resources quite effectively, but there are times when a market economy benefits from government activity to prevent it from collapsing. The primary function of government is to protect the individual rights of its citizens. No economy can expect to operate at any more than a subsistence level without the order provided by the protection of these rights.


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