Quiz 5: Difficult Cases for the Market, and the Role of Government

Business

Production and consumption are two basic activities of an economy. A producer manufactures commodities and sale them to consumer through market. Consumer buys the product by paying money. Payment of money will mean the commodity is now owned by the customer. He has the absolute right to enjoy the need satisfying power according to his own will. No other person can take away the commodity from him without his permission. Market mechanism establishes a relation between buyer and seller and helps them to carry out such transaction. The mechanism that required market to operate successfully, it is necessary to establish one to one relationship between buyer and seller. The market forces enable sellers to collect price for its goods from buyers, while simultaneously moving the ownership of the goods to consumers. Sometimes it becomes very difficult to establish such relation due to existence of market failure. The market failure will happen when nonpaying customers are present in the market. Sometimes it may happen that a customer is not paying any price but he is enjoying the benefit from commodity. Such customers are known as nonpaying customer or free riders. img Example: Suppose government has constructed a road for the people of the locality. Any one can avail the benefit of such road. No one can be prevented to use it. Road has been constructed from the money collected through tax by local authority. When a person is passing through the road then no one will ask him to prove whether he has paid tax or not. It may happen that the person is exempted from paying tax as per rule. In that case he is a non paying customer. He is enjoying equal benefit of a paying customer. Presence of such nonpaying customer will make it very difficult for producer to produce and survive in the business. Like paying customers nonpaying customer will enjoy the same, which would lead to heard of potential customers who would try to look for the same mean as nonpaying customers. Hence identification of paying customers becomes very difficult. Automatically producer will fail to generate a successful market operation. Presence of this type of nonpaying party will make it difficult to establish one to one relation. Hence market mechanism will fail.

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