Market Failure

Market failure refers to the state when markets that function freely, devoid of any kind of state intervention, struggle to provide an optimum allotment of resources. This results in economic inefficiency. As a consequence of market failure social and economic development of a particular region is hindered. Another cause behind the failure of markets is when the company lacks relevant information to judge the returns from a particular venture.

Some of the factors that play a crucial role in market failure include imperfect information, factor immobility, pure public goods and quasi-public goods, equity issues and dominance of the market. In a monopolistic market lack of sufficient competition results in a misallocation of resources. It leads to the wastage of resources that are scarcely available. Market failure can occur as a result of factors like externalities and weak property rights.

Governments can interfere and thereby ensure that there is no market failure. They can improve the state of different markets by public sector production, taxation and subsidies, regulations and antitrust legislation. The government can regulate the prices of privatized utilities, control cartel behaviour and oligopolies, taxation of monopoly profits, the introduction of policies to enhance market competition, direct provision of public goods and pollution taxes to rectify externalities.

Externalities And Market Failure

Market failure may also result due to the presence of externalities. Those reasons may be mentioned as below:

• Externalities can give rise to differences between private costs and benefits and social costs and benefits.
• Suppliers and consumers are expected to account for their personal benefits and costs.
• Producers and individual consumers may not take cognizance of externalities when they make decisions related to production and consumption.

Market Failure And Public Goods

In a free-market economy there might be a failure on part of the market to provide public goods with superior quality.

The following are the chief reasons in this case:

• Free rider issues are the biggest problems in case of market failure.
• If a good is not a pure public good but has some traits of the same it may lead to market failure.
• Not paying costs of provision while availing a public good can lead to market failure.

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