Market Failure and the London Housing Market

This case study discusses the impact of market imperfections and failures on the London housing market, including the effect on entrepreneurship, labor, and financial markets. It also covers the interpretation of UK government economic policies and their effect on business strategies.

The case for Market
Failure and the
London Housing
Market

Contents
INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
Overview of Case Study..............................................................................................................3
Market Imperfection....................................................................................................................4
Types of market imperfection......................................................................................................4
Labour Market.............................................................................................................................4
Financial Market imperfection....................................................................................................5
Reason for market failure in labour market.................................................................................5
Financial market Imperfection.....................................................................................................5
Interpretation of UK government economic policies..................................................................6
Monetary and Fiscal policy.........................................................................................................7
Business strategies and importance in business...........................................................................7
Business Decisions......................................................................................................................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9

INTRODUCTION
Business economics may be defined as a field of applied economics which helps in
understanding organizational, financial and market related issues faced by corporations (Hansen
2018). Market failure may be referred to inefficient distribution of tangible products and
services. This case study is based on market failure of and London Housing Market. This case
study will cover the effect of market imperfections and market failure on entrepreneurship
activities. In addition to that, it will cover market failure and imperfection on labour and
financial products. Further, it will include interpretation of UK economic policies that can shape
business strategy.
TASK
Overview of Case Study
This case study is based on Market failure and London Housing Market. The housing market is
complex in London and have over three million dwellings of various types such as flats,
bungalows and maisonettes. These houses were either owner occupied, privately or socially
rented. The houses of London were made before second world war and very few people own
newly built house. When an individual person buys a home, he also buys location which have a
decent environment and have easy access to transportation and other local services. It is one of
the most expensive purchase that an individual has in his lifetime. Thus, housing market is
directly connected to finance market. In 1990s, there can be seen in falling the prices which
results in facing house owner’s negative equity. All these factors make London market housing
complex. The housing market fails to meet the needs of residents and also do not meet bare
minimum requirements of a decent house. It becomes difficult for people to have their home near
they work. People are facing shortage of houses and the price of houses are rapidly increasing.
There is shortage of land in South East of England and from a survey it has been analysed that
people want house in that place where land is inexpensive and have plenty of space with all
transportation facility available. There is lack of Government intervention and from that there
can be seen shortage of housing allocation and in fluctuation of interest rates.

Market Imperfection
Market imperfection may be referred as an economic market which do not meet rigorous
standards or competitive market. In context to case study, it does not meet standards of housing
market (Johnson, 2021). They were not built which may satisfy resident’s needs. Sometimes they
feel to fulfil the minimum standards that society sets for a decent home. This market
imperfection affects the economy of London along with people’s well-being. The market
imperfection also reflects as there is scarcity of resources and unavailability of land. People
cannot have their home near their work place. Market condition makes market imperfect and due
to change in political factors and economic policies leads to market imperfections (Aastveit,
Natvik and Sola, 2017).
Types of market imperfection
 Homelessness – This may be occurred for various reason such as lack of income,
personal problems and lack of affordable housing (Chaudhuri, 2018). In UK, there are
various landlords who does not sublet their property and unavailability of funds makes
people homeless. They do not have higher income and for that they do cannot decent
house. This shows that free market does not allow in optimal allocation of resources.
 High cost of housing and inequality – It becomes complex for people to afford a house
that fits in their budget due to increased rate of inflation. The rate of housing loans also
makes people to not afford home. As for the young entrepreneurs, it becomes challenging
to afford home along with struggling with their careers. This creates inequality as the
ratio of income to house cost leads to inequality.
 Price instability – There is seen fluctuation in price of houses and volatile in nature.
There is an increment in mortgage. There has been 20% decline in price of housing
market in UK. The fallen price of houses is one of the most crucial reason in economic
recession.
Labour Market
This market is also known as job market and refers to supply of demand in which
employers provide the demand and employee fulfils that. The labour efforts are directly
proportionate to level of pay. In context to this case study due to unavailability of

materials, it has an imperfect market. Rate of inflation is also one of the major reason for
creasing dis balance, People of UK cannot afford decent dwelling that fits into their
budget. Thus, this lower down the demand of labour market and the reason for its
imperfection. People cannot afford higher interest rates and thus affects financial market
too.
Financial Market imperfection
The main reason for the financial market imperfection is higher interest rates and housing
and financial market are interconnected to each other (Black, 2019). People cannot afford
higher interest rates and thus result in creation of financial market inequality. Higher
prices of houses made people in difficulty and imbalance financial market too.
Reason for market failure in labour market
 Geographical immobilities – People wasn’t to opt for a location where he can access all
the essential services but due to higher cost of land makes this difficult. The living cost in
London is high and due to this it becomes difficult to buy a houses and thus causes labour
shortage. There is unavailability of land in UK and due to higher expenses it becomes
difficult to make house.
 Elevation of interest rates - As the inflation in UK increasing rapidly and it becomes
difficult to manage funds to make a decent house that fits in their budget. It has also
affected financial market too as housing and financial market are interconnected to each
other. Thus, the demand of labour decreases due to inflation rates.
 Lack of land – There is lack of land and due to this the demand of labour decreases. Not
having land to construct reduces demand for labours.
Financial market Imperfection
 Inflation rates –Finance is the foundation of any assets and there is been an increment in
inflation rates in housing prices and owner of houses expect for positive equity but would
suffer loss. The inflation rates make people in difficulty as they cannot afford home by
taking loan also.

 Loan interest rates –There is hike in interest rate and that creates market imbalance.
Increased interest rates are one of the most crucial factor in making financial market
imperfect.
 Lack of Income – The income of people is very low and it creates complexity in buying
house. The ratio of income and house cost makes it imperfect.
Interpretation of UK government economic policies
The economic policy of government comprises of systems that cover levels of tax, money
supply, interest rates and labour market along with other key areas of government
interventions (Kalecki, 2017). These policies were formulated in order to do fair trade
practices. The provision of housing shortfall was supplemented by council house building
programmes. The main reason for decline in supply of housing is due to direct
government intervention. The social houses were rapidly declining and it brings to an end
of this market. Thus, lack of government intervention leads to decline in housing market
growth. There are various ways by which government can encourage and uplift housing
market of UK. They may reduce the taxation so that it becomes easy for people to afford
houses near their work place. In addition to that, they can formulate direct provision that
uplifts declining housing market. Inflation rates must be lower down which helps people
to have their own home which fits in their pocket. The fluctuation in interest rates must
be lowered down and it will be benefitted for both housing and financial market. There is
needed a provision regarding allocation of buildings to people in order to provide shelter
to homeless people. As there is difference between income and housing cost which makes
difficult in buying house. As in the UK, most of the houses or dwellings are purchased
and sold on the open market basis.
The local authorities help people in providing accommodation to needy people who are
homeless. This reflects that UK have a great economic policy in which it provides shelter
to needy people. This social service is served through registered social landlords or by
housing associations. The major role of government in housing intervention is to generate
equity rather than efficiency (Hori, 2017).

Monetary and Fiscal policy
The term monetary policy refers to central bank activities that directs towards
making influencing the quantity of credit and money in an economy (Kuo and Wu, 2018).
It involves various factors such as price stability, stability in economic growth and full
employment in order to keep country highly economic. While on the other hand, fiscal
policies refer to spending and tax policies that are formulated by federal government.
Business strategies and importance in business
Business strategies are the blueprint or roadmaps that directs business in operating its
functions in effective manner so that company can attain its objectives effectively and
efficiently. It helps in shaping up its operation by creating a path which leads towards
attainment of goals. It is needed to be formulate strategy in such a manner that yields
higher profit along with optimum utilisation of resources.
Fiscal policy
Neutral policy – In this policy, government is having sufficient fund in the form of collected tax
to pay its expenditures.
Expansionary policy – In this policy, government spends more than its collected taxation.
Thus, it can be said that strategies and policies helps business in shaping up its functions in such
a manner that it yields higher profit. It is important to formulate effectively or it becomes useless.
Business Decisions
They are the choices made by business professional which determines in short and long term
company activities. It involves various stages such as setting up of goals, getting necessary
information and selection of best alternatives among pool of many in order to make decision. It
is the responsibility of manager to take decision which will align resources towards the
attainment of organisational goals. It directs all resources in right direction and becomes easy for
accomplish goals. Following are benefits of making decision.

 Good decision last longer –When a decision is taken by management by properly making
plan and this reduces to revisit decision that is being made using well thought process.
 Decision weigh internal and external factors –It is needed to consider all aspects while
taking decision along with analysing strengths and weakness of company in order to take
right decision.
 Improves efficiency – Good decisions contribute in improving efficiency of company as
it allows in allocating resources in an effective manner which yield higher profit.
CONCLUSION
From the above case study, it was concluded that inflation and interest rates can be considered as
reason for not having dwellings for people. They do not have high income so that they can afford
home. Due to differentiation in their income and interest rates, it had lowered down the housing
and financial market. The prices of houses are increasing and it becomes difficult for people to
buy along with struggling with their life. It has also affected supply and demand of labour due to
high interest rates. Government have to introduced various programmes in order to allocate
house to homeless people with minimal price. This will help in uplifting of housing market and
financial market along with increased economy of UK.

REFERENCES
Books and Journals
Hansen, A.H., 2018. Monetary theory and fiscal policy. Pickle Partners Publishing.
Aastveit, K.A., Natvik, G.J. and Sola, S., 2017. Economic uncertainty and the influence of
monetary policy. Journal of International Money and Finance, 76, pp.50-67.
Johnson, H.G., 2021. Economic policies towards less developed countries (Vol. 1). Routledge.
Black, K., 2019. Business statistics: for contemporary decision making. John Wiley & Sons.
Kalecki, M., 2017. Studies in economic dynamics. Routledge.
Hori, H., 2017. Business Cycle Dynamics and Stabilization Policies. Springer.
Chaudhuri, S., 2018. Negative production externalities, labour market imperfection, and
production tax policy in a developing economy. International trade, welfare, and the
theory of general equilibrium, pp.201-214.
Kuo, K.H., Lee, C.T. and Wu, S.F., 2018. Environmental policy and labour market
imperfection. Bulletin of Economic Research, 70(2), pp.175-184.