Market failure in transport economics

yeah, blah blah blah, I was going on and on about the market failure topic last year and you probably know all about it. but yeah, I need to remind myself.

So, market failure itself is inefficiency of the price mechanism in markets, or, in other words, when allocative and\or productive efficiencies are not achieved.
Allocative effciency is when the consumer's needs are satisfied and price equals marginal cost.
Productive efficiency is when the resources are used effectively, eg the least possible amount of scarce resources are used to produce the maximum output.

There are several types of market failure:
- existance of positive and\or negative externalities, which are quite difficult to calculate in order to include their value in the price.
- information failure
- government failure
- possibly smth else, but i dun remember actually, lol, I have to revise

So, in case of transport, what kind of market failure might arise.
Lots of negative externalities, negative effects on the third party, obviously, such as:
- atmospheric pollution
- noise pollution
- accidents
- congestion (traffic jams)
- visual intrusion
- blight

The government is trying to deal with those by different methods, but there still is one main problem - how to estimate those external costs, which arise from pollution, congestion, accidents, etc.
Even though the costs ARE estimated, another problem is how to include them in the price. The government tends to do it through different types of indirect taxation, as well as applying other methods like road pricing, various regulations, subsidies to support public transport, information provision.
Or introdcuing shadow price - a relative price that is proportional to the opportunity cost for the economy, as so much time is lost in traffic jams, for instance.
The revenue from tax could be allocated to different purposes, such as improvement of infrastructure, extendind roads etc.

For further info, for God's sake, read the freaking texbook!

ps, yeah, I would have commented on that efficent road pricing diagram, but I have already done it in my mock, which I did on Friday. so lol, sorry, no boring diagrams for today.



An oligopoly is another type of market structure. It means that there are several firms in the market, which are dominating. The concentration ratio is high.
The other characteristics would be:
- high barriers to entry - the dominant firms are not likely to give away their market share to other firms, as this might lead to the loss of their position as price makers.
- price stability for long periods. this is because of the kinked demand curve, which actually explains the behaviour of dominating firms in an oligopolistic market. if a firm rises the price, it is likely to lose its customers, who will probably switch to a cheaper service\product provided by its competitor. this will lead to a loss in a firm's market share. lowering the price will lead to a war price, where eventually all the firms will lose out. The behaviour of oligopolistic firms is difficult to predict, that's why the game theory concept, which models the behaviour of firms. It is also know as prisoners dilemma, which is easier to understand for nom-economists. Also I suggest you to read this post, which talks about the main idea of the game theory and its founder, John Nash.
now, coming back to the kinked demand curve:
Chris is very strict to us D:
lol this diagram, nicely presented by tutor2u website, is actually wrong! the marginal revenue curve, which is under an oligopolists' demand curve, should continue starting from Q1 point, not higher that point.
On the diagram we can see that firstly the demand curve is relatively elastic, and the, at a certain point, where the price is set, it becomes relatively inelastic. This actually illustrates what I've said before about pricing strategies of an oligopolistic market.
However, firms might agree with each other about pricing in order to gain higher levels of profits, but it's illegal and restricted by the Competition Commission. Although the firms can still tacticly raise the prices with an unwritten agreement with each other. This is called a collusion, and it's really difficult to prove its existance so the firms cant actually be fined.
- because of inability to play with the price, firms usually have a non-price competition, which includes branding, location, ASS (After Sales Service), product range etc. Everything that might attract customers except for price.