- "Market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value."
The situations where markets fail to allocate resources efficiently, due to externalities, public goods, monopoly power, or other factors. Can lead to inefficiency or inequity, and may require government intervention.
Externalities: When the actions of one economic agent affect the well-being of others without being explicitly considered in the decision-making process.
Public goods: Goods or services that are non-excludable and non-rival in consumption, meaning that they cannot be easily restricted from use by others and their consumption by one individual does not reduce its availability for others.
Information asymmetry: When one party in a transaction has more information than the other, leading to a distorted market outcome where the less-informed party bears higher costs.
Natural monopoly: A market structure where a single firm can supply a whole market at a lower cost than any potential competitor due to economies of scale.
Moral hazard: The tendency of one party to take risks or engage in harmful behavior because they know the costs will be borne by another party.
Adverse selection: When one party in a transaction has access to better information than the other, leading to the selection of suboptimal goods or services.
Price controls: Government regulations that control the price of a good or service, often leading to unintended consequences.
Market power: The ability of a firm to control the market price of a product by influencing supply and demand.
Asymmetric information: When one party has more information about a good or service than the other, leading to market distortions.
Government failure: When government intervention in the market leads to unintended consequences or inefficiencies.
Externalities: Externalities are costs or benefits that are incurred by individuals or firms outside the market transaction. These can be positive or negative, and can lead to an inefficient allocation of resources.
Public goods: Public goods are goods that are non-excludable (i.e. once they are provided, nobody can be excluded from using them) and non-rival (i.e. the consumption of one person does not reduce the availability of the good to others). Since it is difficult to exclude people from using public goods, the market may underprovide them.
Imperfect competition: Imperfect competition refers to situations in which prices do not reflect the true cost of production. This can occur when firms have market power and are able to charge prices that are higher than what would be seen in a competitive market.
Asymmetric information: Asymmetric information refers to situations in which one party has more information than the other. This can lead to adverse selection (where the least desirable products are selected by buyers) and/or moral hazard (where one party takes actions that are not in the best interests of the other party).
Monopoly: Monopoly is a situation in which there is only one supplier in the market. Because the monopolist has the ability to set prices and is not subject to competition, they may charge prices that are higher than what would be seen in a competitive market.
Merit goods: Merit goods are goods that have positive externalities and are therefore underprovided by the market. Examples of merit goods include education and healthcare.
Demerit goods: Demerit goods are goods that have negative externalities and are therefore overprovided by the market. Examples of demerit goods include tobacco and alcohol.
Common pool resources: Common pool resources are resources such as fish stocks or forests that are owned by everyone and therefore subject to overuse. Because nobody has an incentive to conserve the resource, it may be depleted over time.
- "Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient – that can be improved upon from the societal point of view."
- "The first known use of the term by economists was in 1958."
- "Market failures are often associated with public goods, time-inconsistent preferences, information asymmetries, non-competitive markets, principal–agent problems, or externalities."
- "The existence of a market failure is often the reason that self-regulatory organizations, governments or supra-national institutions intervene in a particular market."
- "Such analysis plays an important role in many types of public policy decisions and studies."
- "However, government policy interventions, such as taxes, subsidies, wage and price controls, and regulations, may also lead to an inefficient allocation of resources, sometimes called government failure."
- "Most mainstream economists believe that there are circumstances (like building codes or endangered species) in which it is possible for government or other organizations to improve the inefficient market outcome."
- "Several heterodox schools of thought disagree with this as a matter of ideology."
- "An ecological market failure exists when human activity in a market economy is exhausting critical non-renewable resources, disrupting fragile ecosystems, or overloading biospheric waste absorption capacities."
- "In none of these cases does the criterion of Pareto efficiency obtain."
- "It is critical to create checks on human activities that cause societal negative externalities."
- "Market failures are often associated with... information asymmetries."
- "Market failures are often associated with... principal–agent problems."
- "Market failures are often associated with... non-competitive markets."
- "Government policy interventions, such as taxes, subsidies, wage and price controls, and regulations, may also lead to an inefficient allocation of resources..."
- "Market failures are often associated with... time-inconsistent preferences."
- "Most mainstream economists believe that there are circumstances... in which it is possible for government or other organizations to improve the inefficient market outcome."
- "The concept has been traced back to the Victorian philosopher Henry Sidgwick."
- "Economists, especially microeconomists, are often concerned with the causes of market failure and possible means of correction."