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What is Market Failure?
It is the condition that arises when there is a freely functioning market. It happens when there is no way that they are able to allocate resources efficiently.
The loss of this would be ultimately in the economic and social welfare. This is due to the fact that there are no outcomes in the market that are coming from the competitive market that are not efficient.
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Even this happens due to the fact that there are no outcomes in the market that are coming from the competitive market that are not efficient.
As the benefits in the free market are the firms that are doing some activity that is away from the benefits society would normally get.
The reasons for the market to failure:
a) Negative externalities: It can be due to pollution, etc. They lead to the social cost of production being more than that of the private cost.
b) Positive externalities: They are also called beneficial externalities. The social benefit of consumption is seen to be more than that of the private benefit.
c) Imperfect information: Merit goods are lesser in production than demerit goods, which are produced in large quantities.
d) Pure and quasi-public goods: The private sector cannot supply the consumer pure public goods and quasi-public goods at a profit. This is due to the fact that they are more intent on fulfilling the needs and demands of the consumers.
e) Monopoly: There is market dominance that is seen in the form of monopolies too. They would lead to an increase in the prices and a decrease in the production levels too.
The following would be a few of them:
f) Factor immobility: This is something that leads to unemployment and also to inefficiency in production.
g) Equity: It is also termed fairness. There can be cases when there are unacceptable distribution levels that are seen in the market. This is with relevance to the income. This can lead to social exclusion that the government may choose as a way to solve the issue.
The results of market failure:
There are two major consequences that are to be faced due to these market failures. They are:
a) Productivity inefficiency: This is a problem as the outputs that have been lost could have probably been used in order to satisfy the needs and wants of the consumers.
b) Allocative inefficiency: There are misallocations of goods and services that are actually not needed by the consumers. These resources can actually be used to make the products that the consumers actually need.