Market failure

Factories and refineries provide jobs, but they also pollute the environment. In economics, this is an example of market failure.

In neoclassical economics, a market failure is when the way goods and services are shared out by a free market is not Pareto efficient (the market does not only have good effects.) This often makes goods or services less valuable. Common reasons why market failure happens are information assymmetries, externalities, natural monopolies and public goods.

Market failure is a big reason why countries make rules about markets. When market failures happen, markets do not use social welfare in the best way, even if people do things to benefit themselves. People who believe in neoclassical economics say that market failures happen because regulating groups or governments make rules about a market, but people who hold alternative ideas disagree. Economists, especially microeconomists, try to find out why market failures happen and how to fix them. Finding this out helps to make or change laws and policies.

When the government gets involved, with taxes, subsidies, prices, and regulations, this can also cause the way goods and services are shared out to be inefficient. This can be called a government failure. Most economists think that sometimes the government can fix market failures, like fire safety regulations.

An ecological market failure is when human actions in a market is using up non-renewable resources, disturbing ecosystems, or creating waste faster than the environment can absorb it.

Types

Different people think different things cause market failure. Most economists say there are many causes. Some of these are if there is a monopoly, or there is not enough competition; if making the product creates an externality; if the product is a public good; if there is information asymmetry or if there is unequal bargaining power. More than one of these can happen at the same time.