Market failure is the economic situation defined by an inefficient distribution of goods and services in the free market. In market failure, the individual incentives for rational behavior do not lead to rational outcomes for the group.
In other words, each individual makes the correct decision for him or herself, but those prove to be the wrong decisions for the group. In traditional microeconomics, this can sometimes be shown as a steady-state disequilibrium in which the quantity supplied does not equal the quantity demanded.
KEY TAKEAWAYS
Market failure occurs when individuals acting in rational self-interest produce a less than optimal or economically inefficient outcome.
Market failure can occur in explicit markets where goods and services are bought and sold outright, which we think of as typical markets.
Market failure can also occur in implicit markets as favors and special treatment are exchanged, such as elections or the legislative process.
Market failures can be solved using private market solutions, government-imposed solutions, or voluntary collective actions.
Market Failure
Understanding Market Failure
A market failure occurs whenever the individuals in a group end up worse off than if they had not acted in perfectly rational self-interest. Such a group either incurs too many costs or receives too few benefits. The economic outcomes under market failure deviate from what economists usually consider optimal and are usually not economically efficient. Even though the concept seems simple, it can be misleading and easy to misidentify.
Contrary to what the name implies, market failure does not describe inherent imperfections in the market economy—there can be market failures in government activity, too. One noteworthy example is rent-seeking by special interest groups. Special interest groups can gain a large benefit by lobbying for small costs on everyone else, such as through a tariff. When each small group imposes its costs, the whole group is worse off than if no lobbying had taken place.
Additionally, not every bad outcome from market activity counts as a market failure. Nor does a market failure imply that private market actors cannot solve the problem. On the flip side, not all market failures have a potential solution, even with prudent regulation or extra public awareness.
Common Types of Market Failure
Commonly cited market failures include externalities, monopoly, information asymmetries, and factor immobility. One easy-to-illustrate market failure is the public goods problem. Public goods are goods or services which, if produced, the producer cannot limit its consumption to paying customers and for which the consumption by one individual does not limit consumption by others.
Answers & Comments
Answer:
Market failure is the economic situation defined by an inefficient distribution of goods and services in the free market. In market failure, the individual incentives for rational behavior do not lead to rational outcomes for the group.
In other words, each individual makes the correct decision for him or herself, but those prove to be the wrong decisions for the group. In traditional microeconomics, this can sometimes be shown as a steady-state disequilibrium in which the quantity supplied does not equal the quantity demanded.
KEY TAKEAWAYS
Market failure occurs when individuals acting in rational self-interest produce a less than optimal or economically inefficient outcome.
Market failure can occur in explicit markets where goods and services are bought and sold outright, which we think of as typical markets.
Market failure can also occur in implicit markets as favors and special treatment are exchanged, such as elections or the legislative process.
Market failures can be solved using private market solutions, government-imposed solutions, or voluntary collective actions.
Market Failure
Understanding Market Failure
A market failure occurs whenever the individuals in a group end up worse off than if they had not acted in perfectly rational self-interest. Such a group either incurs too many costs or receives too few benefits. The economic outcomes under market failure deviate from what economists usually consider optimal and are usually not economically efficient. Even though the concept seems simple, it can be misleading and easy to misidentify.
Contrary to what the name implies, market failure does not describe inherent imperfections in the market economy—there can be market failures in government activity, too. One noteworthy example is rent-seeking by special interest groups. Special interest groups can gain a large benefit by lobbying for small costs on everyone else, such as through a tariff. When each small group imposes its costs, the whole group is worse off than if no lobbying had taken place.
Additionally, not every bad outcome from market activity counts as a market failure. Nor does a market failure imply that private market actors cannot solve the problem. On the flip side, not all market failures have a potential solution, even with prudent regulation or extra public awareness.
Common Types of Market Failure
Commonly cited market failures include externalities, monopoly, information asymmetries, and factor immobility. One easy-to-illustrate market failure is the public goods problem. Public goods are goods or services which, if produced, the producer cannot limit its consumption to paying customers and for which the consumption by one individual does not limit consumption by others.