Market imperfection occurs where economies do not adhere to the parameters set for the entire market. The attributes of market imperfection assert that competition is not perfect as some companies will always have a competitive advantage over others. The superior companies act as price makers in the economy. Information regarding the market is not disseminated to all participants, and there are barriers to entry and exit into the industry.
Examples of Market Imperfections
Market imperfections derail efforts to achieve sustainability as few firms in an industry regulate policies and prices for the entire market. Oligopoly competition where sellers produce similar but not homogenous products (Miglo and Miglo, 2019). The market has a few sellers and many buyers. The sellers brand their products differently and set the price based on the product’s implied quality. The automobile industry is an oligopoly competition where few firms control the industry. Monopoly competition occurs where there is only one firm in the industry. The firm offers unique products, and there is a barrier to entry. The single seller sets the market prices for the products without consultation of the demand or supply curve. Monopolistic competition occurs where the market is composed of large numbers of firms selling differentiated products. The firms attract customers by way of incentives and after-sales services. Each business has the authority to set a unique price different from the other firms such as the hospitality business.
There are instances where market imperfections can lead to sustainable development in a market by way of external pressure. Market imperfections often lead to resource imbalances and unsustainable technologies in the industry. The autonomy of the firms makes it difficult to set industry policies to secure the economy and societal needs for posterity. However, there are limitations to the imperfections holding the economy hostage brought about by government intervention.
Taxes and tariffs can be utilized in an economy where an increase in tax is placed on certain products to ensure the firms in that particular industry conform to ethical and sustainable practices. This is done by way of a tax rise in non-biodegradable products and tax reduction on biodegradable raw materials. Market subsidies are aimed at minimizing the use of one component while presenting a viable option. Subsidies in market imperfections reduce the usage of products that are considered harmful. The subsidies work by lowering the costs associated with the alternatives to such a product. The incentives are utilized to reduce the imperfections in an industry by strengthening competitors and shattering entry barriers.
Miglo, A., & Miglo, V. (2019). Market imperfections and crowdfunding. Small Business Economics, 53(1), 51-79.