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Market Failure
It is the economic
situation in which the goods are not effectively distributed among people.
Market failure occurs when there is a state of
disequilibrium in the market due to market distortion. It takes place when the
quantity of goods or services supplied is not equal to the quantity of goods or
services demanded. Some of the distortions that may affect the free market may
include monopoly power, price limits, minimum wage requirements, and government
regulations.
Causes of Market Failure:
a. Positive
and Negative Externalities
An externality is an affect
on a third party that is caused by the consumption or production of a good or
service.
Positive Externality: Positive externality or
benefit is an involuntary gain in the welfare of one party due to activities of
another party.
Negative Externality: Negative externality or cost is
an involuntary loss in the welfare of one party due to activities of another
party.
b. Environmental
Concerns
The effects on the
environments as important considerations as well as sustainable development.
c. Lack
of Public Goods
Public goods are goods
where the total cost of the production does not increase with the number of
consumers. Public goods can be under produced. The problem of free rider in
public goods causes the market failure.
d. Abuse
of Monopoly Power
The imperfect market restrict
output in an attempt to maximize profit.
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