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What is meant by 'Market Failure?? - Laxmi G - 02-19-2014 12:26 PM
Briefly discuss the major weaknesses of the free market economy.
- Lou - 02-19-2014 12:27 PM
short answer is not selling what you have to sell.
Not making money.
- Anita A - 02-19-2014 12:30 PM
Basically market failure is the situations where the "invisible hand" as Adam Smith called it fails to lead the market to an outcome that is optimal. There are four kinds of market failure that I know of off the top of my head these are public goods, negative externalities, positive externalities and market power abuse. Public goods are goods that suffer from non-excludability so once the good is provided everyone can consume it and non-rivalry so me consuming the good doesnt reduce the quantity everyone else can consume. The most common example used for this is a lighthouse because it provides signals for all ships and signal provision for one ship doesnt reduce signal provision for another. Negative externalities are formally defined as goods for which there is a higher marginal social cost than a marginal private cost. This means that the free market overprovides the good. The most common example for this is pollution where the costs of pollution to society arent included to the costs of the firm or the costs of consuming the good. Positive externalities are goods where there is a higher marginal social benefit than there is marginal private benefit. This means that the free market underprovides this good. The most common example for this is education where the government needs to provide this because there isnt that much money to be made by providing education because the benefits to society of education arent included in the income the enterpreneur can make. The final example of a market failure is market power abuse which is basically the emergence of monopolies and oligopolies which the government needs to legislate to prevent.