This essay Market Failure has a total of 414 words and 2 pages.
Market failure occurs due to inefficiency in the allocation of goods and services. A price mechanism fails to account for all of the costs and benefits involved when providing or consuming a specific good. When this happens, the market will not produce the supply of the good that is socially optimal – it will be over or under produced.
In order to fully understand market failure, it is important to recognize the reasons why a market can fail. Due to the structure of markets, it is impossible for them to be perfect. As a result, most markets are not successful and require forms of intervention.
Reasons for market failure include:
Positive and negative externalities: an externality is an effect on a third party that is caused by the consumption or production of a good or service . A positive externality is a positive spillover that results from the consumption or production of a good or service. For example, although public education may only directly affect students and schools, an educated population may provide positive effects on society as a whole. A negative externality is a negative spillover effect on third parties. For example, secondhand smoke may negatively impact the health of people, even if they do not directly engage in smoking.
Environmental concerns: effects on the environment as important considerations as well as sustainable development.
Lack of public goods: public goods are goods where the total cost of production does not increase with the number of consumers. As an example of a public good, a lighthouse has a fixed cost of production that is the same, whether one ship or one hundred ships use its light. Public goods can be underproduced; there is little incentive, from a private standpoint, to provide a lighthouse because one can wait for someone else to provide it, and then use its light without incurring a cost. This problem - someone benefiting from resources or goods and services without paying for the cost of the benefit - is known as the free rider problem.
Underproduction of merit goods: a merit good is a private good that society believes is under consumed, often with positive externalities. For example, education, healthcare, and sports centers are considered merit goods.
Overprovision of demerit goods: a demerit good is a private good that society believes is over consumed, often with negative externalities. For example, cigarettes, alcohol, and prostitution are considered demerit goods.
Abuse of monopoly power: imperfect markets restrict output in an attempt to maximize profit.
Topics Related to Market Failure
Goods, Market failure, Public economics, Welfare economics, Environmental economics, Demerit good, Merit good, Externality, Public good, Market, Spillover effect, Social cost
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