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Market Systems Not Able To Allocate Resources Efficiently Economics Essay

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Published: Mon, 5 Dec 2016

A market may be of variety of different systems, institutions, stages, social relations, and infrastructural facilities whereby buyers and sellers trade, goods and services are exchanged, forming part of the economy, in other words market is any convenient set of arrangement whereby buyers and sellers communicate to exchange goods and services. The basic concept of market is any structure that allows the exchange of goods, services and information. There are financial markets, prediction markets, and so on. Market can be seen in two ways: as a study of abstract mechanism whereby supply and demand meet (equilibrium) and deals are made. And second, it is used as a symbol of integrated and cohesive capitalist world economy. A market system is any systematic process enabling many market players to bid and ask: helping bidders and sellers interact and make deals. It is not just a price mechanism but the entire system of regulation, qualification, credentials, reputation, and clearing that surrounds that mechanism and makes it operate in a social content. -writework (n.d) (online)

There different types of market system such as perfect competition, monopoly, oligopoly, monopolistic competition, monopsony.

Perfect competition market

Perfect competitive is a market characterized by buyers and sellers. In this market there is a high degree of competition due to the high numbers of buyers and sellers. The number of buyers and seller in a perfect competitive market cannot and will not be able to determine the price of goods and services in the market. If so, buyers have no other alternative than to pursue. Buyers and seller have the freedom to enter into the market freely; also firms must be able to establish themselves in the industry easily and quickly. A market if ready and willing to stop production, they must be free to do so.

Monopoly

A monopoly is the exact opposite of a perfect competition market system. In a pure monopoly, there are usually only one producer producing goods and services. In such a market system, the monopolist as the right to charge whatever price supplier wishes to due to lack of competition and also lack of substitute, thereby causing exploitation. Hence, the output might increase or decrease at the long run at the same minimum average cost. For example

Net social cost of a monopoly industry

monopoly

_economicishelp (n.d) (online)

Since the industry is a monopoly, output will be MC=MR at OQM whilst price would be on the demand curve at OPM. Price is higher and output lower in monopoly industry. The welfare loss is shaded in the triangle.

Oligopoly

Oligopoly is so much in many ways like monopoly. The main difference is that instead of having more than one producer of a good and services, there are a lot of producers, or at least a lot of producers that make up a dominant majority of the production in a market system. However, oligopolists do not have the same pricing rights as monopolists, but it is possible with the influence of the government that oligopolists could collide with one another and set prices as that of monopolists.

Monopolistic competition

Monopolistic competition is a type of market system is that combines both monopoly and perfect competitive type of market system. Unlike perfect competitive market, each competitor can be differentiated from the others, that some can charge higher prices than that of the perfect competitive firm. Also in the monopoly market, things are very different in the monopolistic competition market. For example for the monopolistic market, the market for music has many artists but yet is not perfectly substitutable with other artist. However, the monopolistic competition curve is elastic, due to presence of substitute goods. The following diagram can be used to represent the cost structure of a monopolistic competitive firm, whereby the shade the shaded part shows the supernormal profit

Monopolistic competition in the short run

In the long run the demand curve of an individual firm will move to the left, as more firms come into the industry, more differentiated products would be produced. This means that the demand for the product will remain constant, that is unchanging due to introduction of new firms into the business.

Monopolistic competition in the long run

This is a shift in demand curve whereby the demand curve comes in contact with the ATC curve. There is then a single price and quantity at which the firm can produce to break even. No supernormal profits are made as AR = ATC. At any other output ATC >AR, so the firm will make losses. -cyroc.cs-territories (n.d) (online)

Monopsony

Monopsony unlike monopoly has many sellers of a product but only one buyer. So therefore the buyers are given the major right to determine the price of the product. – smallbusiness.chron.com (n.d) (online)

Whereby, free market economy primarily means a system where the buyers and sellers are solely responsible for the choices they make. In a way, free market gives the absolute power to determine the allocation and distribution of goods and services. These prices, in turn, are fixed by the forces of supply and demand of a particular commodity. In cases, whereby, demand falls short of the supply of a particular commodity, the price will fall as opposed to a price rise when the supply is inadequate to meet the growing demand of a good or services. For example, in Nigeria, petrol being a worldwide need, there has being an increase in demand and shortage in supply and yet there is an increase in price of petrol. http://upload.wikimedia.org/wikipedia/commons/thumb/7/7a/Supply-and-demand.svg/240px-Supply-and-demand.svg.png

A graph illustrating a positive shift in demand of petrol from D1 to D2, resulting in an increase in price (p) of petrol, and quantity supplied of petrol in Nigeria. Free market economy is also characterized by free trade without any tariff (tax paid on goods and services going in and out of the country) or subsides imposed by the government

The role of the government of a nation is only limited to controlling the law and order of a country and to ensure that a “fair price” is charged by the sellers to the buyers. That is to say, the government having no role in stating the price of a commodity has to see that the prices taken by sellers is true and commensurate with the prices determined by forces of demand and supply, so as to prevent exploitation of the consumers, thereby, enforcing effective allocation of resources.

An economic system is a system used in allocating resources because resources are limited. According to B.B.G Dictionary of business terms of (1987),” an economic system can be defined as the basic means of achieving economic goals, which is the basic and most important aspect of an economic structure of a society”. There are various types of economic system which are: household economy, the national economy, the local economy, and the international economy. There are also free market economies which aid in solving the economic problem with the little intervention from the government and command economies where the state makes most resources allocation decisions.

According to Anderton.A (2008) the main function of an economic system is to work out the basic problems of a country’s economy, which are: what to produce, how to produce, for whom to produce and how efficient these resources are. Considering the problem what to produce, an economy as the right to produce mix goods. For example, what proportion of output should be spent on defence? What proportion should be spent on the protection of the environment? What proportion should be invested for the future? What proportion should be placed on manufactured goods and what proportion should be placed on services? Also all other problems should be considered. The main causes of these problems are due to limited resources and unlimited want of consumers. Therefore, every country should adopt an appropriate system which would lead to good allocation of goods and services so as to avoid scarcity.

There are three major system adopted, which are: command economic system, Mixed Economic System and Free Market Economic System.

In a command system resources are allocated by the government through the planning system. The main actors in this system are the government, consumers and workers. All factors of production are owned by the government. This system has been linked with the former communist regimes of Eastern Europe and Soviet Union and China while the mixed economic system resources are allocated by both the government and private individuals with the help of the planning mechanism and the market mechanism. This is a very confusing system because it is believed that the roles of government and private individuals often clash, because there is the belief that too much government spending is problematic for the private sector meanwhile the government is expected to prevent market failure.

The Market system of economy which is also called the price system simply put is a means of allocating resources in which the resources are allocated by the “market mechanism” and the major economic problems are resolved by private individuals (Anderton, A. 2006).   It can be seen as a type of laissez-faire economy. In a situation whereby demand does not meet supply, in other words, when there is no equilibrium, that is to say, it is a situation in the market whereby the price is such that the quantity that consumers wish to demand is not correctly balanced by the quantity the supplier or firm is willing to supply. -writework (n.d) (online)

Moreover, using market mechanism for resource allocation in distributed system is not a new idea, nor, is it one that has caught on in practice or with a large body of computer science research. Yet, projects that use markets for distributed resource allocation recur every few years, that is, 1 to 3 years, and a new generation of research is exploring market based resource allocation mechanisms for distributed environments such as planet lab, net bed, and computational grids.

This topic has three main goals. The first goal is to explore why markets can be appropriate to be used for allocation of resources, when simpler allocation mechanisms exist. The second goal is to demonstrate why a new look at markets for allocation could be timely and not a re- hash (change or improvement) of previous research. The third goal is to bring out some of the difficult problems persistent in the market deployment and suggest suitable action items both for market designers and for greater research community.

This topic is specifically about the power of market design, but it is also believed that the key challenges exist for market system integration (combining two things together, so they can work together) that must be overcome for market based computer resource allocation to succeed.

The first thing to consider is that: is there a problem…..

In the past decades, it was noticed that, the emergence of systems that are owned, deployed, and used by multiple self-interested stakeholders, considering the differences that existed between the traditional distributed system and the current distributed system. Current environment or current system has so many properties, and they are:

Many resources, many users, and more complicated needs

Multiple self-interested stakeholders can simultaneously supply and consume some set of resources (e.g. machines, time, and so on). Users can demand large set of disparately controlled resources even while resources are scarce in other words living the producers with no other choice than to make choices which will lead into producers making use of opportunity cost.

Allocative efficiency

This measures whether resources have been allocated to those goods and services demanded by the consumers. In other word, the good and services demanded by consumers must have enough resources allocated to them.

Factors of production

According to Anderton.A (2008), land being a natural commodity is one of the factors of production because of the presence of resources within and above the crust. There are non-renewable resources such as coal, gold, oil and copper in which when used cannot be replaced and renewable resources, such as fish, stocks, forests and water. There are also sustainable resources; these are particular types of renewable resources. They are ones which can be exploited economically and which will not diminish or run out. Example of sustainable resources is forests. There are other factors of production such as capital, labour, and entrepreneur. If there can be a mobility in factors of production it will aid allocation of resources efficiently.

According to Anderton.A (2008), there are different economic actors which are: consumers, firms, workers, and the government.

Consumers

In economics, consumers are known to maximise their own economic welfare, sometimes referred to as utility or satisfaction. They are faced with the problem of scarcity. They do not have enough income to be able to purchase all the goods and services they would like. So they have to allocate their resources to achieve their objectives. To do this, they consider the utility to be gained from consuming extra unit of a product with its opportunity cost. (Anderton.A (2008))

Workers

Workers are assumed to want to maximise their own welfare at work. Evidence suggests that the most important factor in determining welfare is the level pay. So workers are assumed to want to maximise their earnings in a job. However, other factors are also important. Payment can come in form of fringe benefits, like company cars. (Anderton.A (2008))

Firms

The objectives of firms are often mixed. However, in the UK and USA, the usual assumption is that the firms are in business to maximise their profits. This is because firms are owned by private individuals who want to maximise their returns on ownership. This is usually achieved if the firm is making the highest level of profit possible. (Anderton.A (2008))

Government

In economics the government have traditionally been assumed to want to maximise the welfare of the citizens of their country or locality. They act in the best interest of all. This is always very difficult because it is most times not immediately obvious what the cost and benefits of a decision are. There are not often any consensus about the value to put on the gains and losses of different groups. (Anderton.A (2008))

Market system may and may not be able to allocate resources efficiently. For example:

According to Udeme.E (2012)”It was noticed that the Spanish and Italian bond yields fell drastically in over half a year on Friday after euro zone leaders firmed up plans for a , common bank watchdog.

Reuters reported on Monday that world shares and the euro remained on course for strong weekly gains despite a slight dip. Europeans leaders at a summit in Brussels said a new supervisor would be in place next year, paving the way for the bloc’s rescue fund to inject capital directly into ailing banks. With the prospect of European central bank support looming, benchmark Spanish bond yields have come down around half a percentage point this week and both Spain and Italy have seen dramatically stronger bond sales. Spanish 10-year yields fell to their lowest in 6-1/2 months as markets digested news from the EU summit. Italian yields also fell to levels not seen in over 7 months, helped by a jumbo sale of four-year bonds on Thursday. ‘There is more of a general understanding that the ECB backstop is actually effective,’ Unicredit chief euro zone economist, Mr. Macro Valli, said of the central bank pledge to buy sovereign bonds on the secondary market. ‘The market has brought yields in Italy and Spain down to levels which, for the time being, seem to be much more consistent with debt sustainability,’ he added. ‘The question now remains that will Spain go for support? And if so, when?'” – Udeme, E (2012). It is so obvious that the market system in Spain and Italy cannot, or will not be able to allocate resources efficiently. It is also obvious that market system as caused a drastic fall in the sales of bonds in Spain and Italy.

Now the question still remains, will market system be able to allocate resources efficiently?

It was often argued that people, in general and regardless of the environment in wish they grew up, acquire the moral values they practice, apart from those they claim to hold, from the economic system they labour under. The opinion is that reality provides them with no other choice, which has been made eternally famous in the maxim; Good citizens tend to finish last. Although it is impossible to provide a solid proof of the claim, there is a short important narrative evidence for it.

It is rather obvious that free market capitalism transforms immorality. It is engine is exploitation, deceit, greed, corruption, and fraud, which results in crime, poverty, and a host of other social ills. I suppose that the United States of America is the best type of example for this. But there are even more convincing evidences.

Israel was founded as a socialist country.  “The socialist bit–that’s gone altogether. When Israel became America’s little buddy, she also changed over–not fortuitously, during the Reagan years–to a hard-edged capitalist economy. The operation could be called a success, there is a lot more money in the economy, now; and it is easier to do business. But for the first time, there are also homeless people, and families who say they cannot find work, or enough to eat. [Cramer, Richard Ben, How Israel Lost, p. 26]” The BBC has recently reported that “in the last four years the Israeli police have lost control of the country’s organized criminals, who are making millions from gambling, prostitution and drugs.” And the Israeli government is prevalent with corruption.

A similar situation has existed also in Russia since the collapse of the USSR (union of soviet socialist republic). Again, the BBC has recently reported that “Russian President Vladimir Putin has said that organized crime is still controlling large parts of the country’s economy and not enough is being done to stop it. It was said that many businessmen still faced interference from both criminals and corrupt government. And up to 7,000 murderers had not been brought to justice, partly because of ‘weak’ law enforcement. Murders, kidnappings, criminal attacks and robberies have turned into something of a fact of life,” And poverty is indigenous: “prior to the decomposition of the Soviet Union in 1991, that country’s economic and social system worked in a practical sense, meaning most people had a place to live and food to eat. Although, standards of living were below those in the West, particularly in housing, daily life was predictable. The Soviet leadership was legitimately able to say that their form of socialism had succeeded in virtually eliminating the kind of poverty that existed in Czarist Russia. Russian citizens now live in different times. The country’s transformation to a more open economic system has created a large new group of people in poverty.”

I doubt that these events are mere coincidence, and in each nation, the costs of dealing with these social ills are huge. Just consider how much money Americans spend on police, courts, prisons, welfare, uninsured medical care, abused children, and the host of other American social ills. The cost is enormous and completely unproductive. It follows that if these social ills are caused directly by the economic system, then they have to be attributed to that system.

One of the claims economists make is that the free market system efficiently allocates economic resources, and they praise this as one of the systems greatest advantages. But if the social ills mentioned above are caused by the system, this claim cannot possibly be true.

Aside from this, the claim has never been verified. In fact, no one has ever attempted or tried to verify it. I suppose the claim is derived from some other equally unproven beliefs held by economists. There is the belief, for instance, that profit oriented enterprises are more efficient than non-profit, especially governmental enterprises, and its corollary that efficient enterprises succeed while inefficient ones fail. But I am aware of no studies that have been done that even attempt to prove the validity of either of these claims. Anyone who has ever worked for a successful, for-profit company knows that these claims are not even close to being true. Inefficiency abounds in even the best of them.

So is not it time someone put our economists on the spot? Are our social ills the direct consequence of our economic system? And if so, how can it be called an efficient allotter of economic resources? And if it isn’t, isn’t it time to think of making some fundamental modification or change to it, to prevent these unproductive social costs? -jkozy (n.d) (online)


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