Market failure Guide, Meaning , Facts, Information and Description

In economics, a market failure is a case in which a market fails to efficiently provide or allocate goods and services. More generally, market failure refers to situations where market forces do not serve the perceived "public interest." Economists use model-like theorems to explain such cases. The two main reasons that markets fail are sub-optimal market structures and the inability to internalize costs or benefits into prices and thus into microeconomic decision-making in markets.

Examples of the inability to internalize economic costs or benefits into prices include:

• externality
  • network externality
• public goods and common property resources
  • Tragedy of the commons
  • Free rider problem
• undefined property rights
• asymmetrical information
  • adverse selection
  • moral hazard
  • principal-agent problem
• market power

Strategies to reduce these imperfections require alternative, non-market, institutions, such as the centralized government or state, tradition, and/or community democracy. These are often studied in the field of collective action. See also Coase theorem.

Examples of sub-optimal market structures include:

• imperfect competition
  • monopoly
  • monopsony
  • oligopoly
  • oligopsony
  • monopolistic competition
• downward sloping longrun average cost curve, i.e. natural monopoly
• price discrimination
  • price skimming

As could be expected, the issue of market failures (and how they should be addressed) is a source of dispute between different schools of economic thought. Many advocates of laissez-faire capitalism, such as economists of the Austrian School, often deny the existence of market failures altogether, or see them as irrelevant or temporary.

Others, such as social democrats and "New Deal liberals", view market failures as an ubiquitous problem of any unregulated market system, and therefore argue for extensive state intervention in the economy, in order to ensure both efficiency and social justice.

In the current era, we sometimes see professed New Deal liberal intentions merged with free-market ideas to form neoliberalism. In this vein, some propose "market-oriented solutions" to market failure: for example, they propose going beyond the common idea of having the government charge a fee for the right to pollute (internalizing the external cost, creating a disincentive to pollute) to allow polluters to sell the pollution permit. Often companies in other industries are willing to buy such permits, so that the government created an artificial market for pollution rights.

Meanwhile, the Marxist school of economics also sees market failure as an inherent (though not necessarily widespread) feature of any capitalist economy. It should be noted, however, that although Marxists argue for the abolition of capitalism, they often do not bring up the issue of market failure in their arguments (preferring to concentrate on other aspects instead). They do not see the "perfect market" (one without failures) as reasonable goal, while seeing capitalist exploitation, class conflict, and economic crises as existing even with "perfect" markets. Even when they do discuss this issue, they note that government leaders and those who benefit from market failures (polluters, monopolists, etc.) often form alliances, so that the government is not a neutral purveyor of technocratic solutions. Only popular pressure on both the government and the companies benefiting from market failure can lead to success in reducing the abuses of capitalism.

Modern macroeconomics, especially that of the Keynesian or new Keynesian varieties, takes into account the existence of market failures which prevent the automatic attainment of full employment of resources and the working of Say's Law.

See also

• Microeconomics
• Externality
• Social cost

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