Understand the Problem
The text discusses the allocation function in public finance, explaining how resources are allocated among various uses and the importance of efficient allocation in an economy. It also addresses market failures and the conditions under which public and merit goods may not be produced sufficiently.
Answer
Imperfect competition, insufficient provision of public goods, and incomplete markets.
Markets fail to provide efficient resource allocation due to imperfect competition, insufficient provision of public goods, and incomplete markets.
Answer for screen readers
Markets fail to provide efficient resource allocation due to imperfect competition, insufficient provision of public goods, and incomplete markets.
More Information
Markets are not perfectly competitive in reality, leading to inefficiencies in resource allocation. Imperfect competition can lead to monopolies, which cause under-production and higher prices. Public goods are often not adequately provided by the market, requiring government intervention, and incomplete markets can fail to produce sufficient quantities of merit goods.
Tips
A common mistake is to assume that markets without government intervention always lead to efficient resource allocation. In reality, market imperfections and failures necessitate government involvement.
Sources
- The allocation function - Public Finance - bpswise.icai.org
