Market Failure

[King112]

Hey

I really haven't been able to get my head around Market Failure. Can anyone explain to me what exactly Market Failure is? 

Thanks

King112

[EconDaddy]

It's easy: market failure happens when the free market fails in allocating resources efficiently. In most cases the market left on its own (=free market), without any govt' intervention is the best way to allocate scarce resources in the most efficient way. However, in some cases the free market allocation of resources is not efficient:

1. sometimes there is an overproduction of a good/service which causes overall social benefit to be less than overall social costs (this is what we call a negative externality). Example: cigarette consumption: society's costs are high (even those who are not consuming it pay its price)
2. sometimes there is an underproduction of a good/service. In this case overall social benefit is higher than overall social costs but there is not enough produced of this good/service by the free market (this is what we call a positive externality). Example: education

Moreover, there are other forms of market failure, such as inequality and short-termism.

 

Let me know if anything is still unclear.