Misconception About The Market Failure Of Income Inequality
Market failure is a situation where scarce resources in the country are not being allocated in an efficient manner or some goods are not being provided to the individuals who need them more. Market failure can occur due to many reasons. Students who want to learn more about the causes of market failure can sign up for a JC economics tuition with an experienced JC economics tutor in Singapore. To the rising demand for JC economics tuition services in Singapore over the last decade, there has been a large increase in the number JC economics tuition service providers. Income inequality is a cause of market failure. However, not many students really understand why income inequality is a cause of market failure.
Erroneous Explanation: Too Little Supply
Some students think that income inequality is a cause of market failure as insufficient resources will be allocated to the production of goods which low income individuals want to buy. As the free market will only respond to what economists like to call effective demand, producers in the country will use a lot of resources to produce the goods which high income individuals want to buy. The effective demand for a good is not only the desire to buy the good. It is the desire to but the good backed by the purchasing power which is the ability to but the good. Students can take JC economics tuition from an experienced JC economics tutor in Singapore to acquire more knowledge of effective demand. In contrast, as low income individuals have low incomes, their demand for many goods are ineffective which means that they are not backed by the purchasing power. Therefore, producers in the country allocate limited resources to the production of goods which these individuals want to buy. The above explanation may seem correct at first though. However, it is erroneous. The reason why low income individuals are denied access to some goods as a result of income inequality is that the prices of the goods are pushed up by high income individuals who buy too much of the same goods. For example, low income individuals may not be able to afford housing because high income individuals buy too many houses. Any JC economics tutor with a few years of teaching experience will be able to teach you this in their JC economics tuition class.
Erroneous Explanation: Too Little Demand
Some students think that income inequality is a cause of market failure as the demand for some goods will be too low due to income inequality. As discussed earlier, as the free market will only respond to effective demand. Therefore, low income individuals who do not have the ability pay for a good will not have an effective for the good. Accordingly, the demand for the good will be too low which will lead to under-consumption of the good. However, this explanation is also erroneous. The reason why low income individuals are unable to afford a good due to income inequality is the fact that high income individuals who have a high ability as well as willing to pay for the good are buying too much of the good. Therefore, although the demand for the good by low income individuals is low, the demand for the same good by high income individuals is high. It follows that one cannot conclude that the overall demand for the good is too low. Individuals who would like to have greater knowledge of why income inequality is a cause of market failure, one option is to take JC economics tuition from a good JC economics tutor. With the help of a good JC economics tutor, one will also be able to learn other causes of market failure in JC economics tuition which include externalities and information failure.
Jacky Liu
Economics Tuition Singapore @ Economics Cafe
Principal Economics Tutor: Mr. Edmund Quek