Cambridge International as and a level Economics Ebook

SELF-ASSESSMENT TASK 
6.2
Using knowledge from your own country where 
possible, state in what ways the following might 
achieve dynamic effi
ciency:
a
the food processing industry
b
livestock 
farming
c
postal 
services.
Equilibrium and eff iciency: 
Eff iciency and ineff iciency 
can be explained in various ways. These are dynamic 
concepts in so far as over time markets and indeed 
economies can move from being eff icient to being 
ineff icient and back to being eff icient.
KEY CONCEPT LINK
Market failure
It is stating the obvious to say that market failure exists 
when a market fails. However, the question needs to be 
asked: ‘Fail at what?’ Th
e answer is: ‘Fail at delivering 
economic effi
ciency.’ Market failure exists whenever a 
free market, left to its own devices and totally free from 
any form of government intervention, fails to make 
the optimum use of scarce resources. Using earlier 
terminology, it is when the interaction of supply and 
demand in a market does not lead to productive and/or 
allocative effi
ciency. In other words, there is 
not 
an effi
cient 
allocation of resources. Th
ere are various reasons why 
market failure occurs. Th
ey include:
■ 
where there are externalities present in the market
■ 
the provision of merit and demerit goods (see 
Chapter 1)
■ 
the provision of public and quasi-public goods (see 
Chapter 1)
■ 
information failure (see 
Chapter 1)
■ 
adverse selection or moral hazard (see 
Chapter 1
)
■ 
abuse of monopoly power in the market.
Equilibrium and eff iciency, regulation and 
equality: 
Market failure arises because the free market 
mechanism is not always eff icient in the way in which 
resources are allocated. As will be seen later, this 
invariably necessitates various types of regulation to 
make good market failure. This intervention can aid social 
equality and equity.
KEY CONCEPT LINK