What are some of the potential obstacles that can prevent a market from reaching the efficient outcome? Briefly define each obstacle

Question

What will be an ideal response?

Answer 1

With one exception, the obstacles basically fall into two camps: Obstacles that occur because the government does not intervene in the market and obstacles that occur because the government does intervene in the market. In the first group are the issues of externalities, public goods, common resources, high transactions costs, and monopoly. An external cost or benefit occurs when a cost or benefit from production falls upon someone other than the producer or when a cost or benefit from consumption falls upon someone other than the demander. A public good is a good or service that can be consumed simultaneously by everyone even if they didn't pay for the good or service. Public goods create the free rider problem, in which people consume the good without paying for it. A common resource is a resource that no one owns and that everyone can use. Finally, a monopoly occurs when a single producer controls the market by being the only producer. In the case of an externality, public good, or monopoly, government intervention has the possibility of increasing the market's efficiency.
A second set of obstacles occur when a market is otherwise efficient but nonetheless the government intervenes in the market. The second group is comprised of price and quantity regulations as well as taxes and subsidies. Price regulations might prevent the market from reaching its equilibrium. Quantity regulations, such as quotas, are direct limits on the amount of a good that a firm can produce. Because this quantity will usually be less than the quantity the market would produce, the quota is inefficient. Taxes increase the price paid by the buyer and decrease the price received by the seller. Subsidies have the opposite effect, decreasing the price paid by the buyer and increasing the price received by the seller.
The last obstacle that can prevent a market from reaching efficiency is high transactions costs. If the costs of using a market are too high, then a market will not exist.