Market failure occurs in the market for artificially scarce goods since they are economically inefficient. These goods are excludable and nonrival in consumption. In other words, suppliers of the good can prevent people who don’t pay for the good from consuming it and the same unit of the good can be consumed by more than one person at the same time. For example, me watching Jaws on Netflix doesn’t prevent you from watching it on Netflix as well.
According to the article, “Netflix had $14.9 billion in revenue and $1.3 billion in profit for the last 12 months” (Lee). However, Netflix has committed to spending $18.6 billion on content being produced for next year. Netflix pays a huge upfront cost to provide content on their site which is why they need people to pay them to use their service. Unless Netflix can earn revenue for producing the good, they will be unable to produce at all. This leaves society even worse off. The fact that there are people paying for Netflix’s services means that Netflix has some benefit to society. In fact, Netflix has “130 million paying customers as of September” and “7.6 million more paid subscribers expected to be added in the last three months of 2018” along with “23 Emmy Awards this year, the same as HBO” (Lee).
Clearly, people enjoy the content provided by Netflix. Artificially scarce goods can lead to market failure because they suffer from inefficiently low consumption. Because films on Netflix are excludable, people who are not willing to pay do not get to consume the good. Furthermore, because the films on Netflix are nonrival in consumption, the marginal cost of an individual’s consumptions is zero. Therefore, the price that the supplier charges for the artificially scarce good exceeds marginal cost, leading to inefficiency in the market, otherwise known as market failure. Artificially scarce goods lead to deadweight loss on the consumer’s side. Graphically, an artificially scarce good will have a demand curve that slopes downward and the equilibrium will be when the demand curve hits the x-axis since marginal cost is equal to 0.
The deadweight loss is equal to the quantity where the demand curve hits the x-axis minus the quantity supplied at the fee multiplied by the price of the service and then divided by 2. In summary, Netflix is an example of market failure because it provides artificially scarce goods in the form of films, where Netflix can prevent people who don’t pay from enjoying their content, even though making the content available to the next person doesn’t cost anything. While all the people who are willing to watch Netflix for free could be watching their content, only the people willing to pay Netflix’s fee get to watch the films. This creates deadweight loss on the consumer side. Deadweight loss indicates economic inefficiency, which by definition is market failure.
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