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What Is Market Failure?

Understanding market failure, causes of market failure.

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Market failure: what it is in economics, common types, and causes.

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• A Practical Guide to Microeconomics
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• Introduction to Supply and Demand
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• Law of Demand
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• Market Failure CURRENT ARTICLE

Market failure refers to a situation defined by an inefficient distribution of goods and services in the free market. In an ideally functioning market, the forces of supply and demand balance each other out, with a change on one side of the equation leading to a change in price that maintains the market's equilibrium. In a market failure, however, this balance is disrupted.

When markets fail, 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 themselves, but those prove to be the wrong decisions for the group as a whole.

Key Takeaways

• Market failure refers to the inefficient allocation of resources that occurs when individuals acting in rational self-interest produce a sub-optimal outcome.
• Market failure can occur in explicit markets where goods and services are bought and sold outright, or in implicit markets such as elections or the legislative process.
• It may be possible to correct market failures using private market solutions, government-imposed solutions, or voluntary collective actions.

Matthew Collins / Investopedia

A market failure refers to the inefficient distribution of resources that occurs when the individuals in a group end up worse off than if they had not acted in rational self-interest. In the case of a market failure, the overall group 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 .

Contrary to what the name implies, market failure does not describe imperfections only in market economies. There can be market failures in government activity, too. One noteworthy example is rent seeking by special interest groups. Special interest groups can 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.

Not every bad outcome from market activity counts as a market failure. In addition, while correcting the imbalances underlying a market failure often requires government intervention, private-market actors may also be able to solve the problem. On the flip side, not all market failures have a potential solution, even with prudent regulation or extra public awareness.

There are many types of imbalances that can affect the equilibrium of the markets. The following list provides an overview of some common causes of market failure.

• Externalities: Externalities occur when the consumption of a good or service benefits or harms a third party. Pollution resulting from the production of certain goods is an example of a negative externality that can hurt individuals and communities. The collateral damage caused by negative externalities may lead to market failure.
• Information failure: When there is insufficient information available to certain participants in the market, this can also be the source of market failure. If the buyer or seller in a transaction lacks access to the information on which the price is based, they may be willing to overpay or undercharge for a good or service, disrupting the market's equilibrium.
• Market control: When one party has too much control over a market, this can also create imbalanced pricing and lead to market failure. In the case of a monopoly or oligopoly , a single seller or a small group of sellers can manipulate pricing. In other situations, known as monopsony or oligopsony , it is the buyers that have the advantage. In either case, the disrupted balance of supply and demand could cause market failure.
• Public goods: Public goods are another example of market failure because they defy the tenets of supply and demand that drive the free markets. Public goods and services are nonexcludable—once something like a street light is produced, it is accessible to everyone, and the producer cannot limit consumption only to paying customers. Public goods are also nonrival, as use by one individual does not limit consumption by others. Given these characteristics, the private sector has little incentive to produce public goods, which leads to market failure, and the government usually has to provide these goods or subsidize their production.

Solutions to Market Failure

There are many potential solutions for market failure. These can take the form of private market solutions, government-imposed solutions , or voluntary collective action solutions.

• Private market solutions: In some instances, the solution to a market failure may emerge within the private market itself. For example, asymmetrical information could be solved by intermediaries or rating agencies such as Moody's and Standard & Poor's informing market participants about securities risk. Underwriters Laboratories LLC performs the same task for electronics. Negative externalities such as pollution may be solved with tort lawsuits that increase opportunity costs for the polluter. Radio broadcasts elegantly solved the non-excludable problem by packaging periodic paid advertisements with the free broadcast.
• Government-imposed solutions: When the solution does not come from the market itself, governments can enact legislation and take other measures as a response to a market failure. For example, if businesses hire too few low-skilled workers after a minimum wage increase, the government can create exceptions for less-skilled workers. Governments can also impose taxes and subsidies as possible solutions. Subsidies can help encourage behavior that can result in positive externalities. Meanwhile, taxation can help cut down negative behavior. For example, placing a tax on tobacco can increase the cost of consumption, therefore making it more expensive for people to smoke.
• Collective action solutions: While the government may have the upper hand in developing legislative, tax, or regulatory solutions, private collective action can also help solve the market failure. Parties can privately agree to limit consumption and enforce rules among themselves to overcome the market failure of the tragedy of the commons . Consumers and producers can band together to form co-ops to provide services that otherwise might be underprovided in a pure market, such as a utility co-op for electric service to rural homes or a co-operatively held refrigerated storage facility for a group of dairy farmers to chill their milk at an efficient scale.

What Are Common Types of Market Failures?

Types of market failures include negative externalities, monopolies, inefficiencies in production and allocation, incomplete information, and inequality.

How Can Market Failure Be Corrected?

The primary means by which market failure can be corrected is through government intervention. This requires the government to pass legislation such as antitrust policies and to incorporate various price mechanisms such as taxes and subsidies.

Is Poverty a Market Failure?

Poverty is considered to be a result of market failure. When a recession hits, the poverty rate increases because employees lose their jobs or lose working hours, which results in no income or less income. Inequality, which is a component of market failure, can eventually lead to poverty when wealth is not distributed equally throughout society. This can be remedied with government intervention, such as by taxing the wealthy more or incorporating subsidies for those below the poverty level.

Market failure refers to inefficient allocation of resources in the free market that occurs when individuals acting in rational self-interest generate sub-optimal economic outcomes. These economic inefficiencies may occur in explicit markets where goods and services are exchanged, or in implicit markets such as the exchange of favors in the legislative process.

The causes underlying market failures include negative externalities, incomplete information, concentrated market power, inefficiencies in production and allocation, and inequality. Government intervention such as taxes and subsidies may be effective in solving market failures, while other solutions may emerge within the private market or through collective actions.

Bator, Francis M. “ The Anatomy of Market Failure .” The Quarterly Journal of Economics, vol. 72, no. 3, August 1958, pp. 351–379.

Helm, Dieter. “ Government Failure, Rent-Seeking, and Capture: The Design of Climate Change Policy .” Oxford Review of Economic Policy, vol. 26, no. 2, Summer 2010, pp. 182.

Zerbe Jr., Richard O. and McCurdy, Howard E. “ The Failure of Market Failure .”  Journal of Policy Analysis and Management, vol. 18, no. 4, September 1999, pp. 558–578.

University of Minnesota via Pressbooks. " Principles of Economics: 6.3 Market Failure ."

Zerbe Jr., Richard O. and McCurdy, Howard E. “ The Failure of Market Failure .”  Journal of Policy Analysis and Management, vol. 18, no. 4, September 1999, pp. 561.

Missouri State University. " Market Structure: Oligopoly (Imperfect Competition) ," Page 1.

Johnson, Marianne. “ Public Economics, Market Failure, and Voluntary Exchange .”  History of Political Economy, vol. 47, no. 5, 2015, pp. 174–198.

Gillingham, Kenneth and Sweeney, James. " Chapter 5: Market Failure and the Structure of Externalities ." Harnessing Renewable Energy in Electric Power Systems, Pages 87–109, Routledge, 2010.

Shepsle, Kenneth A. and Weingast, Barry R. “ Political Solutions to Market Problems .”  American Political Science Review, vol. 78, no. 2, June 1984, pp. 417–434.

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Market Failures

Definitions and Basics

Definition: Market failure , from Investopedia

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.

Market Failures, Taxes, and Subsidies , at Crash Course Economics:

Winston on Market Failure and Government Failure , on EconTalk, December 2009.

Clifford Winston  of the Brookings Institution talks about the ideas in his book,  Market Failure vs. Government Failure,  with EconTalk host  Russ Roberts . Winston summarizes a large literature on antitrust, safety regulation and environmental regulation. He finds that government regulation often fails to meet its objectives. While markets are imperfect, so is government. Winston argues that idealized theories of government intervention based on textbook theories of market failure are not the way regulation turns out in practice. He argues that special interest politics explains much of the disappointing outcomes of government regulation.

Public goods and externalities. What is an externality? Public Goods and Externalities , from the Concise Encyclopedia of Economics

Most economic arguments for government intervention are based on the idea that the marketplace cannot provide public goods or handle externalities . Public health and welfare programs, education, roads, research and development, national and domestic security, and a clean environment all have been labeled public goods…. Externalities occur when one person’s actions affect another person’s well-being and the relevant costs and benefits are not reflected in market prices. A positive externality arises when my neighbors benefit from my cleaning up my yard. If I cannot charge them for these benefits, I will not clean the yard as often as they would like. (Note that the free-rider problem and positive externalities are two sides of the same coin.) A negative externality arises when one person’s actions harm another. When polluting, factory owners may not consider the costs that pollution imposes on others….

Externalities: When is a Potato Chip Not Just a Potato Chip? at LearnLiberty

What is a public good? Defense , from the Concise Encyclopedia of Economics

National defense is a public good . That means two things. First, consumption of the good by one person does not reduce the amount available for others to consume. Thus, all people in a nation must “consume” the same amount of national defense (the defense policy established by the government). Second, the benefits a person derives from a public good do not depend on how much that person contributes toward providing it. Everyone benefits, perhaps in differing amounts, from national defense, including those who do not pay taxes. Once the government organizes the resources for national defense, it necessarily defends all residents against foreign aggressors….

Market-clearing vs. sticky prices: New Keynesian Economics , from the Concise Encyclopedia of Economics

The primary disagreement between new classical and new Keynesian economists is over how quickly wages and prices adjust. New classical economists build their macroeconomic theories on the assumption that wages and prices are flexible. They believe that prices “clear” markets—balance supply and demand—by adjusting quickly. New Keynesian economists, however, believe that market-clearing models cannot explain short-run economic fluctuations, and so they advocate models with “sticky” wages and prices . New Keynesian theories rely on this stickiness of wages and prices to explain why involuntary unemployment exists and why monetary policy has such a strong influence on economic activity….

Markets can fail if there are no property rights and negotiation is costly. The Coase Theorem: Ronald H. Coase , biography from the Concise Encyclopedia of Economics

“The Problem of Social Cost,” Coase’s other widely cited article (661 citations between 1966 and 1980), was even more path-breaking. Indeed, it gave rise to the field called law and economics. Economists b.c. (Before Coase) of virtually all political persuasions had accepted British economist Arthur Pigou’s idea that if, say, a cattle rancher’s cows destroy his neighboring farmer’s crops, the government should stop the rancher from letting his cattle roam free or should at least tax him for doing so. Otherwise, believed economists, the cattle would continue to destroy crops because the rancher would have no incentive to stop them. But Coase challenged the accepted view. He pointed out that if the rancher had no legal liability for destroying the farmer’s crops, and if transaction costs were zero, the farmer could come to a mutually beneficial agreement with the rancher under which the farmer paid the rancher to cut back on his herd of cattle. This would happen, argued Coase, if the damage from additional cattle exceeded the rancher’s net returns on these cattle. If for example, the rancher’s net return on a steer was two dollars, then the rancher would accept some amount over two dollars to give up the additional steer. If the steer was doing three dollars’ worth of harm to the crops, then the farmer would be willing to pay the rancher up to three dollars to get rid of the steer. A mutually beneficial bargain would be struck….

An Education in Market Failure , by Morgan Rose. Teacher’s Corner at Econlib, March 11, 2002.

Markets are fantastic at allocating resources well by making sure that if there is a good or a service that a person values more highly than it would cost to produce it, then somebody (maybe the same person, but most likely not) will decide to produce it, a market exchange will take place, and both parties will be better off. If I think an order of chicken wings is worth more than six dollars…. Markets can be problematic where the net private benefit of a market transaction does not equal the net social benefit , which is the social benefit (the sum of private benefits of all individuals in a society) minus the social cost (the sum of private costs of all individuals in a society)….

In the News and Examples

There exists a tendency to automatically assume that the “solution” to a market failure is necessarily some form of government intervention. Not so fast… Is Market Failure a Sufficient Condition for Government Intervention? by Art Carden and Steven Horwitz at Econlib. April 1, 2013.

Externalities, public goods, asymmetric information, and market power provide necessary—but insufficient—conditions for intervention to be justified. They certainly are not talismans that provide interventionists with  carte blanche  to tinker with the members of a society as if they were pieces on a chessboard. Too often, critics of markets think that merely invoking these terms destroys the case for free markets.

An Introduction to Externalities , at Marginal Revolution University

Pollution Controls , from the Concise Encyclopedia of Economics

While there is general agreement that we must control pollution of our air, water, and land, various interest groups, public agencies, and experts have disputed just how we should control it. The pollution control mechanisms adopted in the United States have tended toward detailed regulation of technology….

Trading Pollution: How Pollution Permits Paradoxically Reduce Emissions , at Marginal Revolution University.

A Little History: Primary Sources and References

John Maynard Keynes , biography from the Concise Encyclopedia of Economics

Advanced Resources

A. C. Pigou, The Economics of Welfare .

Coase on Externalities, the Firm, and the State of Economics on EconTalk, May 2012.

Nobel Laureate  Ronald Coase  of the University of Chicago talks with EconTalk host  Russ Roberts  about his career, the current state of economics, and the Chinese economy. Coase, born in 1910, reflects on his youth, his two great papers, “The Nature of the Firm” and “The Problem of Social Cost”. At the end of conversation he discusses his new book on China,  How China Became Capitalist  (co-authored with Ning Wang), and the future of the Chinese and world economies.

“The Failure of Market Failure,” Part I and Part II , by Anthony de Jasay at Econlib. October 2, 2006 and November 2, 2006, respectively.

Received wisdom advances two broad reasons why government is entitled to impose its will on its subjects, and why the subjects owe it obedience, provided its will is exercised according to certain (constitutional) rules. One reason is rooted in production, the other in distribution—the two aspects of social cooperation. Ordinary market mechanisms produce and distribute the national income, but this distribution is disliked by the majority of the subjects (notably because it is ‘too unequal’) and it is for government to redistribute it (making it more equal or bend it in other ways, a function that its partisans prefer to call ‘doing social justice’). However, the market is said to be deficient even at the task of producing the national income in the first place. Government is needed to overcome market failure. A society of rational individuals would grasp this and readily mandate the government to do what was needful (e.g. by taxation, regulation and policing) to put this right. In this two-part essay, I claim that at least some, if not the whole, of the market failure argument fails to prove its case. In Part I , I look at the problem of contract enforcement and in Part II at the provision of public goods. There have been other writings using related arguments to the same effect, but one more such will not be too many.

Related Topics

Markets and Prices

Roles of Government

Property Rights

Government Failures and Public Choice Analysis

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6.3 Market Failure

Learning objectives.

• Explain what is meant by market failure and the conditions that may lead to it.
• Distinguish between private goods and public goods and relate them to the free rider problem and the role of government.
• Explain the concepts of external costs and benefits and the role of government intervention when they are present.
• Explain why a common property resource is unlikely to be allocated efficiently in the marketplace.

Private decisions in the marketplace may not be consistent with the maximization of the net benefit of a particular activity. The failure of private decisions in the marketplace to achieve an efficient allocation of scarce resources is called market failure . Markets will not generate an efficient allocation of resources if they are not competitive or if property rights are not well defined and fully transferable. Either condition will mean that decision makers are not faced with the marginal benefits and costs of their choices.

Think about the drive that we had you take at the beginning of this chapter. You faced some, but not all, of the opportunity costs involved in that choice. In particular, your choice to go for a drive would increase air pollution and might increase traffic congestion. That means that, in weighing the marginal benefits and marginal costs of going for a drive, not all of the costs would be counted. As a result, the net benefit of the allocation of resources such as the air might not be maximized.

Noncompetitive Markets

The model of demand and supply assumes that markets are competitive. No one in these markets has any power over the equilibrium price; each consumer and producer takes the market price as given and responds to it. Under such conditions, price is determined by the intersection of demand and supply.

In some markets, however, individual buyers or sellers are powerful enough to influence the market price. In subsequent chapters, we will study cases in which producers or consumers are in a position to affect the prices they charge or must pay, respectively. We shall find that when individual firms or groups of firms have market power, which is the ability to change the market price, the price will be distorted—it will not equal marginal cost.

Public Goods

Some goods are unlikely to be produced and exchanged in a market because of special characteristics of the goods themselves. The benefits of these goods are such that exclusion is not feasible. Once they are produced, anyone can enjoy them; there is no practical way to exclude people who have not paid for them from consuming them. Furthermore, the marginal cost of adding one more consumer is zero. A good for which the cost of exclusion is prohibitive and for which the marginal cost of an additional user is zero is a public good . A good for which exclusion is possible and for which the marginal cost of another user is positive is a private good .

National defense is a public good. Once defense is provided, it is not possible to exclude people who have not paid for it from its consumption. Further, the cost of an additional user is zero—an army does not cost any more if there is one more person to be protected. Other examples of public goods include law enforcement, fire protection, and efforts to preserve species threatened with extinction.

Free Riders

Suppose a private firm, Terror Alert, Inc., develops a completely reliable system to identify and intercept 98% of any would-be terrorists that might attempt to enter the United States from anywhere in the world. This service is a public good. Once it is provided, no one can be excluded from the system’s protection on grounds that he or she has not paid for it, and the cost of adding one more person to the group protected is zero. Suppose that the system, by eliminating a potential threat to U.S. security, makes the average person in the United States better off; the benefit to each household from the added security is worth $40 per month (about the same as an earthquake insurance premium). There are roughly 113 million households in the United States, so the total benefit of the system is $4.5 billion per month. Assume that it will cost Terror Alert, Inc., $1 billion per month to operate. The benefits of the system far outweigh the cost.

Suppose that Terror Alert installs its system and sends a bill to each household for $20 for the first month of service—an amount equal to half of each household’s benefit. If each household pays its bill, Terror Alert will enjoy a tidy profit; it will receive revenues of more than $2.25 billion per month.

But will each household pay? Once the system is in place, each household would recognize that it will benefit from the security provided by Terror Alert whether it pays its bill or not. Although some households will voluntarily pay their bills, it seems unlikely that very many will. Recognizing the opportunity to consume the good without paying for it, most would be free riders. Free riders are people or firms that consume a public good without paying for it. Even though the total benefit of the system is $4.5 billion, Terror Alert will not be faced by the marketplace with a signal that suggests that the system is worthwhile. It is unlikely that it will recover its cost of $1 billion per month. Terror Alert is not likely to get off the ground.

The bill for $20 from Terror Alert sends the wrong signal, too. An efficient market requires a price equal to marginal cost. But the marginal cost of protecting one more household is zero; adding one more household adds nothing to the cost of the system. A household that decides not to pay Terror Alert anything for its service is paying a price equal to its marginal cost. But doing that, being a free rider, is precisely what prevents Terror Alert from operating.

Because no household can be excluded and because the cost of an extra household is zero, the efficiency condition will not be met in a private market. What is true of Terror Alert, Inc., is true of public goods in general: they simply do not lend themselves to private market provision.

Public Goods and the Government

Because many individuals who benefit from public goods will not pay for them, private firms will produce a smaller quantity of public goods than is efficient, if they produce them at all. In such cases, it may be desirable for government agencies to step in. Government can supply a greater quantity of the good by direct provision, by purchasing the public good from a private agency, or by subsidizing consumption. In any case, the cost is financed through taxation and thus avoids the free-rider problem.

Most public goods are provided directly by government agencies. Governments produce national defense and law enforcement, for example. Private firms under contract with government agencies produce some public goods. Park maintenance and fire services are public goods that are sometimes produced by private firms. In other cases, the government promotes the private consumption or production of public goods by subsidizing them. Private charitable contributions often support activities that are public goods; federal and state governments subsidize these by allowing taxpayers to reduce their tax payments by a fraction of the amount they contribute.

Figure 6.15 Public Goods and Market Failure

Because free riders will prevent firms from being able to require consumers to pay for the benefits received from consuming a public good, output will be less than the efficient level. In the case shown here, private donations achieved a level of the public good of Q 1 per period. The efficient level is Q *. The deadweight loss is shown by the triangle ABC.

While the market will produce some level of public goods in the absence of government intervention, we do not expect that it will produce the quantity that maximizes net benefit. Figure 6.15 “Public Goods and Market Failure” illustrates the problem. Suppose that provision of a public good such as national defense is left entirely to private firms. It is likely that some defense services would be produced; suppose that equals Q 1 units per period. This level of national defense might be achieved through individual contributions. But it is very unlikely that contributions would achieve the correct level of defense services. The efficient quantity occurs where the demand, or marginal benefit, curve intersects the marginal cost curve, at Q *. The deadweight loss is the shaded area ABC; we can think of this as the net benefit of government intervention to increase the production of national defense from Q 1 up to the efficient quantity, Q *.

Note that the definitions of public and private goods are based on characteristics of the goods themselves, not on whether they are provided by the public or the private sector. Postal services are a private good provided by the public sector. The fact that these goods are produced by a government agency does not make them a public good.

External Costs and Benefits

Suppose that in the course of production, the firms in a particular industry generate air pollution. These firms thus impose costs on others, but they do so outside the context of any market exchange—no agreement has been made between the firms and the people affected by the pollution. The firms thus will not be faced with the costs of their action. A cost imposed on others outside of any market exchange is an external cost .

We saw an example of an external cost in our imaginary decision to go for a drive. Here is another: violence on television, in the movies, and in video games. Many critics argue that the violence that pervades these media fosters greater violence in the real world. By the time a child who spends the average amount of time watching television finishes elementary school, he or she will have seen 100,000 acts of violence, including 8,000 murders, according to the American Psychological Association. Thousands of studies of the relationship between violence in the media and behavior have concluded that there is a link between watching violence and violent behaviors. Video games are a major element of the problem, as young children now spend hours each week playing them. Fifty percent of fourth-grade graders say that their favorite video games are the “first person shooter” type 1 .

Any tendency of increased violence resulting from increased violence in the media constitutes an external cost of such media. The American Academy of Pediatrics reported in 2001 that homicides were the fourth leading cause of death among children between the ages of 10 and 14 and the second leading cause of death for people aged 15 to 24 and has recommended a reduction in exposure to media violence (Rosenberg, M., 2003). It seems reasonable to assume that at least some of these acts of violence can be considered an external cost of violence in the media.

An action taken by a person or firm can also create benefits for others, again in the absence of any market agreement; such a benefit is called an external benefit . A firm that builds a beautiful building generates benefits to everyone who admires it; such benefits are external.

External Costs and Efficiency

Figure 6.16 External Costs

When firms in an industry generate external costs, the supply curve S 1 reflects only their private marginal costs, MC P . Forcing firms to pay the external costs they impose shifts the supply curve to S 2 , which reflects the full marginal cost of the firms’ production, MC e . Output is reduced and price goes up. The deadweight loss that occurs when firms are not faced with the full costs of their decisions is shown by the shaded area in the graph.

The case of the polluting firms is illustrated in Figure 6.16 “External Costs” . The industry supply curve S 1 reflects private marginal costs, MC p . The market price is P p for a quantity Q p . This is the solution that would occur if firms generating external costs were not forced to pay those costs. If the external costs generated by the pollution were added, the new supply curve S 2 would reflect higher marginal costs, MC e . Faced with those costs, the market would generate a lower equilibrium quantity, Q e . That quantity would command a higher price, P e . The failure to confront producers with the cost of their pollution means that consumers do not pay the full cost of the good they are purchasing. The level of output and the level of pollution are therefore higher than would be economically efficient. If a way could be found to confront producers with the full cost of their choices, then consumers would be faced with a higher cost as well. Figure 6.16 “External Costs” shows that consumption would be reduced to the efficient level, Q e , at which demand and the full marginal cost curve ( MC e ) intersect. The deadweight loss generated by allowing the external cost to be generated with an output of Q p is given as the shaded region in the graph.

External Costs and Government Intervention

If an activity generates external costs, the decision makers generating the activity will not be faced with its full costs. Agents who impose these costs will carry out their activities beyond the efficient level; those who consume them, facing too low a price, will consume too much. As a result, producers and consumers will carry out an excessive quantity of the activity. In such cases, government may try to intervene to reduce the level of the activity toward the efficient quantity. In the case shown in Figure 6.16 “External Costs” , for example, firms generating an external cost have a supply curve S 1 that reflects their private marginal costs, MC p . A per-unit pollution fee imposed on the firms would increase their marginal costs to MC e , thus shifting the supply curve to S 2 , and the efficient level of production would emerge. Taxes or other restrictions may be imposed on the activity that generates the external cost in an effort to confront decision makers with the costs that they are imposing. In many areas, firms and consumers that pollute rivers and lakes are required to pay fees based on the amount they pollute. Firms in many areas are required to purchase permits in order to pollute the air; the requirement that permits be purchased serves to confront the firms with the costs of their choices.

Another approach to dealing with problems of external costs is direct regulation. For example, a firm may be ordered to reduce its pollution. A person who turns his or her front yard into a garbage dump may be ordered to clean it up. Participants at a raucous party may be told to be quiet. Alternative ways of dealing with external costs are discussed later in the text.

Common Property Resources

Common property resources are resources for which no property rights have been defined. The difficulty with common property resources is that individuals may not have adequate incentives to engage in efforts to preserve or protect them. Consider, for example, the relative fates of cattle and buffalo in the United States in the nineteenth century. Cattle populations increased throughout the century, while the buffalo nearly became extinct. The chief difference between the two animals was that exclusive property rights existed for cattle but not for buffalo.

Owners of cattle had an incentive to maintain herd sizes. A cattle owner who slaughtered all of his or her cattle without providing for replacement of the herd would not have a source of future income. Cattle owners not only maintained their herds but also engaged in extensive efforts to breed high-quality livestock. They invested time and effort in the efficient management of the resource on which their livelihoods depended.

Buffalo hunters surely had similar concerns about the maintenance of buffalo herds, but they had no individual stake in doing anything about them—the animals were a common property resource. Thousands of individuals hunted buffalo for a living. Anyone who cut back on hunting in order to help to preserve the herd would lose income—and face the likelihood that other hunters would go on hunting at the same rate as before.

Today, exclusive rights to buffalo have been widely established. The demand for buffalo meat, which is lower in fat than beef, has been increasing, but the number of buffalo in the United States is rising rapidly. If buffalo were still a common property resource, that increased demand, in the absence of other restrictions on hunting of the animals, would surely result in the elimination of the animal. Because there are exclusive, transferable property rights in buffalo and because a competitive market brings buyers and sellers of buffalo and buffalo products together, we can be reasonably confident in the efficient management of the animal.

When a species is threatened with extinction, it is likely that no one has exclusive property rights to it. Whales, condors, grizzly bears, elephants in Central Africa—whatever the animal that is threatened—are common property resources. In such cases a government agency may impose limits on the killing of the animal or destruction of its habitat. Such limits can prevent the excessive private use of a common property resource. Alternatively, as was done in the case of the buffalo, private rights can be established, giving resource owners the task of preservation.

Key Takeaways

• Public sector intervention to increase the level of provision of public goods may improve the efficiency of resource allocation by overcoming the problem of free riders.
• Activities that generate external costs are likely to be carried out at levels that exceed those that would be efficient; the public sector may seek to intervene to confront decision makers with the full costs of their choices.
• Some private activities generate external benefits.
• A common property resource is unlikely to be allocated efficiently in the marketplace.

The manufacture of memory chips for computers generates pollutants that generally enter rivers and streams. Use the model of demand and supply to show the equilibrium price and output of chips. Assuming chip manufacturers do not have to pay the costs these pollutants impose, what can you say about the efficiency of the quantity of chips produced? Show the area of deadweight loss imposed by this external cost. Show how a requirement that firms pay these costs as they produce the chips would affect the equilibrium price and output of chips. Would such a requirement help to satisfy the efficiency condition? Explain.

Case in Point: Externalities and Smoking

Figure 6.17

Russellstreet – Smoker – CC BY-SA 2.0.

Smokers impose tremendous costs on themselves. Based solely on the degree to which smoking shortens their life expectancy, which is by about six years, the cost per pack is $35.64. That cost, of course, is a private cost. In addition to that private cost, smokers impose costs on others. Those external costs come in three ways. First, they increase health-care costs and thus increase health insurance premiums. Second, smoking causes fires that destroy more than $300 million worth of property each year. Third, more than 2,000 people die each year as a result of “secondhand” smoke. A 1989 study by the RAND Corporation estimated these costs at $0.53 per pack.

In an important way, however, smokers also generate external benefits. They contribute to retirement programs and to Social Security, then die sooner than nonsmokers. They thus subsidize the retirement programs of the rest of the population. According to the RAND study, that produces an external benefit of $0.24 per pack, leaving a net external cost of $0.29 per pack. Given that state and federal excise taxes averaged $0.37 in 1989, the RAND researchers concluded that smokers more than paid their own way.

Economists Jonathan Gruber of the Massachusetts Institute of Technology and Botond Koszegi of the University of California at Berkeley have suggested that, in the case of people who consume “addictive bads” such as cigarettes, an excise tax on cigarettes of as much as $4.76 per pack may improve the welfare of smokers.

They base their argument on the concept of “time inconsistency,” which is the theory that smokers seek the immediate gratification of a cigarette and then regret their decision later. Professors Gruber and Koszegi argue that higher taxes would serve to reduce the quantity of cigarettes demanded and thus reduce behavior that smokers would otherwise regret. Their argument is that smokers impose “internalities” on themselves and that higher taxes would reduce this.

Where does this lead us? If smokers are “rationally addicted” to smoking, i.e., they have weighed the benefits and costs of smoking and have chosen to smoke, then the only problem for public policy is to assure that smokers are confronted with the external costs they impose. In that case, the problem is solved: through excise taxes, smokers more than pay their own way. But, if the decision to smoke is an irrational one, it may be improved through higher excise taxes on smoking.

Sources: Jonathan Gruber and Botond Koszegi, “A Theory of Government Regulation of Addictive Bads: Optimal Tax Levels and Tax Incidence for Cigarette Excise Taxation,” NBER Working Paper 8777, February 2002; Willard G. Manning et al., “The Taxes of Sin: Do Smokers and Drinkers Pay Their Way?” Journal of the American Medical Association , 261 (March 17, 1989): 1604–1609.

Answer to Try It! Problem

Figure 6.18

In the absence of any regulation, chip producers are not faced with the costs of the pollution their operations generate. The market price is thus P 1 and the quantity Q 1 . The efficiency condition is not met; the price is lower and the quantity greater than would be efficient. If producers were forced to face the cost of their pollution as well as other production costs, the supply curve would shift to S 2 , the price would rise to P 2 , and the quantity would fall to Q 2 . The new solution satisfies the efficiency condition.

1 See Report of the Committee on Commerce, Science, and Transportation, Children’s Protection From Violent Programming Act , Senate Report 106–509 (October 26, 2000), Washington, D.C.: U.S. Government Printing Office, 2000, and Michael Rich, “Violent Video Games Testimony,” Chicago City Council, October 30, 2000, at http://www.aap.org/advocacy/rich-videogameviolence.pdf .

2 Common property resources are sometimes referred to as open access resources.

Rosenberg, M., “Successful State Strategies,” Adolescent Health Leadership Forum, December 6, 2003, at http://www.aap.org/advocacy/ahproject/AHLSuccessful StateStrategiesMRosenberg.pps .

Principles of Economics Copyright © 2016 by University of Minnesota is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License , except where otherwise noted.

Market Failure: Definition, Causes and Examples

• Post author: Viren Rehal
• Post published: June 25, 2024
• Post category: Demand and Supply / Microeconomics
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Defined within the free market context, market failure denotes the ineffective allocation of goods and services. This imbalance transpires when the volume of services or goods supplied does not align with consumer demand, resulting in market disequilibrium. Such disparities are instigated by various influences, namely externalities, public goods, monopolistic powers, information asymmetry, moral hazard, and adverse selection.

The inception of market failures from externalities, such as pollution from production, exacts a toll on individuals and communities, fostering a negative impact. Furthermore, the provision of public goods, inherently lacking in exclusivity or rivalry, faces undersupply in a market-dominated setting, compelling governmental interference or fiscal support.

Entrenched market controls, illustrated through monopolies or oligopolies, signify undue market leverage that disrupts equitable pricing, thus promulgating market inefficiency. Simultaneously, the shortfall of crucial market information leads to skewed market decisions, either overvaluing or undervaluing commodities or services, thereby undermining market balance.

The aftermath of market failure manifests in resource misallocation, instigating significant economic and social ramifications. A profound comprehension of the etiologies and rectifications of these failures is indispensable for stakeholders aiming to boost both economic productivity and societal well-being.

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What is Market Failure?

Market failure describes the inadequacy of the free market to distribute resources effectively, leading to inefficiencies in the economy. In an ideal market, the interplay between supply and demand ensures a natural equilibrium. Hence, alterations in supply or demand adjust product prices and maintain general market stability. When market failure strikes, this natural balance is upset, causing improper allocation of goods and services.

Inefficient Distribution of Resources

Market failure occurs when the supply of products or services does not match consumer demand, throwing the market into disequilibrium. This lack of balance can result in negative economic and social ramifications.

Disequilibrium in the Market

Market disequilibrium leads to the improper distribution of resources. The mismatch between supply and demand can create either a surplus or a shortage of goods and services. This, in turn, leads to price distortions, which fail to mirror actual manufacturing costs and value. The breakdown of the market’s ability to self-regulate carries profound consequences on both economic and social welfare.

Causes of Market Failure

Market failure emerges from various critical factors, notably externalities, public goods, market control, and also information asymmetries. Therefore, these elements can precipitate a skewed distribution of resources, leading to outcomes that fall short of societal optimization.

Externalities

Externalities, characterized by the influence of a good or service’s production or consumption on third parties not directly implicated, often culminate in market failures. The detrimental effects of negative externalities, exemplified by pollution’s adverse impacts on health and ecosystems, stand in contrast to the challenging valuation of positive externalities, which include the collective benefits of public education without direct charges.

Public Goods

Public goods, by their non-exclusion and non-rival nature, also present a formidable barrier for free markets to allocate efficiently, as consumption can occur without commensurate financial contribution. Moreover, this inherent inability of markets to adequately price and distribute public goods spawns a “free rider” dilemma, thwarting their provision and contributing to market failures. Prime examples span national defence, public health endeavours, and fundamental infrastructure developments.

Market Control

Market control, manifested through monopolistic or oligopolistic dominion, also yields market failure. In these scenarios, entities with overwhelming market power leverage their position to dictate both the pricing and availability of goods and services. This exploitation typically results in inflated prices, diminished supply, and compromised consumer welfare, undermining efficient resource distribution.

Imperfect or Asymmetric Information

The presence of imperfect or asymmetric information, tipping the balance of knowledge in economic transactions, is instrumental in market disruption. Originating dilemmas include adverse selection and moral hazard.

Moral Hazard

In the scenario of moral hazard, protective measures spur riskier engagements, and market failures become inevitable. The distortion of price signals and resource allocation is inherent in a system wherein true consequences are obfuscated, further perpetuating inefficiency.

Adverse Selection

Adverse selection, linked to market participation skewed by information imbalances favouring certain parties, also introduces inefficiencies. As a result, misalignment of pricing and resource allocation underscores a failure of market mechanisms.

Market failure and Inefficient Allocation

Violation of market assumptions.

Market failure can manifest in various ways, ultimately leading to an inefficient allocation of resources. Central to this is the  violation of market assumptions , which constitute the necessary conditions for a market to efficiently operate. If these conditions are not satisfied, for instance, due to externalities, public goods, or informational asymmetry, the market’s allocation mechanism fails to achieve optimal social welfare.

The non-fulfilment of essential assumptions for a market’s efficient functionality underpins market failure. Hence, this encompasses scenarios where  externalities  are unaccounted for in market prices, or where the provisioning of  public goods  falls short, as their consumption cannot be feasibly charged for. Moreover, the presence of monopolies or oligopolies wielding  market control  engenders an inefficient allotment of resources. Such entities, by setting prices and controlling quantities, prioritize their profits over social welfare.

Production with Increasing Economies of Scale

Inefficiency may also arise due to  production with increasing economies of scale . Therefore, sectors witnessing a decline in average production costs with output expansion empower single large entities to surpass smaller competitors, fostering a monopolistic or oligopolistic industry structure. Consequently, consumers face elevated prices, coupled with diminished output, distorting resource allocation markedly, as opposed to scenarios in competitive markets.

Public Goods and Non-Excludability

Public goods also serve as a focal point for market inadequacies. Furthermore, they are characterized by two essential features: non-excludability and non-rivalry. The former entails the impossibility, or extreme difficulty, of barring individuals from utilizing a good based on their payment status. Meanwhile, non-rivalry stipulates that the consumption of a unit does not deplete its availability for others. Prime examples comprise national defence, public parks, and public education.

Non-Rivalry

The concept of non-rivalry is pivotal in defining public goods. It highlights that the use of such items by one entity does not curtail their availability to others. Take national defence, where each citizen enjoys a safeguard that is not diminished by others’ relish. Hence, this essence of non-rivalry strengthens the argument for public goods provision, often lacking in private-sector engagements.

Free Rider Problem

The free rider phenomenon emerges from the ability of some to partake in public goods without discharging costs. This arises from the goods’ inherent non-excludable nature, hence, fostering an environment where consumption can outpace contribution. Consequently, the voluntary sector tends to under-supply these items, manifesting in suboptimal collective welfare. To rectify this imbalance, governmental actions like taxation or subsidies become indispensable for aligning provisions with societal interests.

Externalities and Market Distortions

Externalities stand as a significant contributor to market failure. They manifest when the production or consumption of goods impacts third parties outside the direct transaction. Positive externalities represent unquantifiable benefits of providing a service, while negative counterparts present unquantifiable costs. For example, research and development exemplify a positive externality; conversely, air pollution is a negative one.

Positive Externalities

Positive externalities offer societal benefits beyond the direct consumer, such as the outcomes of investing in education. An instance of this is benefiting an entire community through the creation of green spaces. Hence, to promote the creation of such public goods, governments utilize subsidies.

Negative Externalities

Conversely, negative externalities can spur overproduction if producers are not fully accountable for all incurred costs. Pollution represents a pivotal case, whereby the failure to internalize its costs leads to market skewing. As a result, to rectify this, governments employ taxation and regulatory mechanisms.

Understanding externalities’ influence and taking measures to mitigate them is essential in avoiding market failures and further enhancing the efficient allocation of resources.

Market Power and Monopolies

The issue of market control, notably the presence of monopolies and oligopolies, stands as a pivotal challenge in market functionality. When an entity holds sway as the sole or as part of a small collective of market actors, it possesses the capacity to dictate pricing and output levels. The result is often a pursuit of maximal individual profit, as opposed to the ideal allocation of resources for societal benefit.

The delineation of monopoly power includes entities exerting influence over 25% of a given market, with a classical monopoly featuring a singular producer facing numerous consumers. Noteworthy are the deleterious impacts monopolies have on consumers, including escalated prices and curtailed market supply, also engendering consumer distress. Furthermore, monopolies stand accused of price-fixing, proffering inferior goods, and introducing inflationary pressures into economies.

An oligopoly’s scaffold, characterized by a handful of producers, often cultivates conditions ripe for collusion and price manipulation, thereby undermining consumer autonomy and fostering elevated prices. Just as monopolistic control over a market impels inefficiency against consumer interests, this overlordship by a select few also disregards the impetus for innovation and cost-efficiency, stemming from a lack of competitive forces.

Lack of Competition

At the crux of the problem lies the disruption of the equilibrium in market dynamics, largely facilitated by monopolistic supremacy. Noted economists, including the venerable Milton Friedman, position only those monopolies sheltered by governmental decree as drivers of market malfunction. The predatory and limit-pricing strategies monopolies employ, ultimately to stifle and deter potential market entrants, are seen as instrumental in market failure.

Asymmetric Information and Market Failure

Asymmetric information, an imbalance where one party holds superior or more extensive knowledge in a transaction, frequently underpins market failures. This disparity results in outcomes like adverse selection or moral hazard.

The critical analysis underscores the 2007-2008 subprime mortgage crisis as emblematic of asymmetric information and moral hazard’s detrimental implications in financial spheres. This crisis prominently illustrated how information asymmetry can catalyze market downturns via mispriced assets and misrepresented security qualities. Moreover, in the context of borrower-lender engagements, concealed adverse information or potential risks by borrowers may inflate the costs of unsecured loans, attributing such an increase to incomplete information disclosure.

The exploitative potential by sellers on buyers due to informational advantage is highlighted, showcasing the pervasive influence of asymmetric information across transactional experiences. This phenomenon sparks dynamics of specialization and knowledge fragmentation within economic frameworks. Ideal for a functioning economy, the proliferation of complete information serves to enhance market efficiencies, primarily through the consolidation of expertise and critical insight. In instances like insurance agreements, adverse selection underscored by informational skew necessitates the utilization of reputation-based mechanisms within financial landscapes to deter exploitation by finance professionals.

Solutions to Market Failure

When the market is unable to appropriately distribute resources, governmental entities may step in to rectify these concerns. Essential responses to these market failures involve governmental intervention, the establishment of laws and regulations, and utilizing fiscal policy measures such as taxes and subsidies.

Government Intervention

In addressing market deficiencies, governments assume a key role by directly offering public goods typically overlooked by the private sector. This includes pivotal elements like national security, communal spaces, and necessary infrastructure, all of which are imperative for social welfare. Moreover, authorities can mitigate the impacts of undesired externalities by imposing regulations or levying taxes, thus steering economic actors towards decisions that account for broader societal costs.

In contrast, governmental bodies bolster positive externalities by financially supporting ventures that enhance the common good, such as initiatives in education, or those centered around innovation and growth.

Legislation and Regulations

Legislation and regulatory frameworks serve as effective tools against market failures. A pertinent example is the prohibition of activities that lead to detrimental externalities, as seen in urban car restrictions or legal measures to prevent the sale of alcohol to minors. Furthermore, these bodies can employ regulations to enhance marketplace fairness. This includes actions to ensure competitive markets by preventing monopolistic or oligopolistic practices, which may impede ideal market functionality.

Taxes and Subsidies

Utilizing tax and subsidy policies is pivotal in managing market failures. By adjusting levies on goods or services that generate adverse externalities, governments can influence behaviour, steering individuals away from choices that harm the common good. For example, the taxation of items like tobacco and alcohol serves not only as a revenue source but as a means to minimize societal harm through price adjustments.

In addition, offering financial incentives for ventures that create positive externalities is a strategy employed to champion initiatives in sectors such as sustainable energy or knowledge dissemination. These efforts are designed to stimulate the production and consumption of goods and services that grant societal benefits.

Market failure, a multifaceted dilemma, emerges when the laissez-faire system inadequately distributes resources, causing economic inefficiencies and suboptimal societal results. Root causes include externalities, public goods, market control, asymmetric information, moral hazard, and adverse selection, making its resolution complex.

For remediation, governments may intervene using legislative, regulatory, taxing, and subsidizing mechanisms. These efforts are designed to rectify market inefficiencies but can potentially induce their own inefficacies, dubbed government failure. Hence, policymakers face the arduous task of meticulously considering the merits and pitfalls of policy interventions to optimize resource allocation and societal welfare.

The ongoing dialogue between market dynamics, governmental interference, and failure causes underscores the imperative of sustained scholarly inquiry and policy evaluation in this realm. Enhanced comprehension of market failure’s fundamental mechanics and the efficacy of response strategies enables economists and policymakers to sculpt more effective and just economic frameworks, furthering the interests of all involved parties.

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• Introduction

Historical remedies for market failure

• Contemporary reforms and market failure

market failure

market failure , failure of a market to deliver an optimal result. In particular, the economic theory of market failure seeks to account for inefficient outcomes in markets that otherwise conform to the assumptions about markets held by neoclassical economics (i.e., markets that feature perfect competition, symmetrical information, and completeness). When failure happens, less welfare is created than could be created given the available resources. The social task then becomes to correct the failure.

The theory of market failure is at the heart of several economic analyses that support government action (intervention) in markets for goods and services or that justify outright government production. Many social welfare programs find their theoretical justification in market failure or in other violations of the standard market assumptions.

Criticism of the market failure notion and of using government to remedy market failure’s effects has been articulated in the public choice school of economics. Public choice scholarship has had great impact on contemporary reforms of the public sector , replacing the Keynesian economics logics that drove much public service expansion. Such critiques have led to reforms seeking to replace governments with markets to challenge or remedy market failure.

The descriptions of market failure were developed in the middle of the 20th century as part of a larger school of Keynesian welfare and macroeconomics. Important contributors included Arthur C. Pigou , Francis Bator, William Baumol, and Paul A. Samuelson . Those theorists were concerned with the correspondence between free market outcomes and social welfare optimization. In standard economics the “ invisible hand ,” or duality, theorem holds that laissez-faire market performance and Pareto optimality go hand in hand. When consumers and producers respond to price signals, they make their own decisions about whether to buy or sell and how to produce the good. The aggregate of those choices is the same as the Pareto optimal, or socially optimal, distribution. Pareto optimality —which takes its name from Italian economist Vilfredo Pareto —is attained when it is impossible to find an alternative that would make one actor better off while keeping all others as well off as before. Welfare economists were concerned with conditions under which that correspondence failed and sought to describe such conditions.

The interest in exceptions to the invisible hand theorem led to the study of violations of the standard market assumptions. Those assumptions include perfect competition, perfect information, complete markets, and the absence of market failures. Markets fail under any of three conditions: production has increasing economies of scale; goods in the market are public; or production or consumption has externalities.

Increasing economies of scale

When producing one more of a good leads to a lower average cost of producing each good, production of the good has increasing economies of scale . Economists have found that when economies of scale increase regardless of how much is produced, few or no firms can survive as producers in the market. The standard concern with increasing economies of scale is that market forces will lead to monopoly production. Monopolies are sole providers of goods in a market, so they can charge any price they find suits their needs. Economists find that this leads to a suboptimal level of production and consumption. In addition, increasing economies of scale may push all producers out of a market if none can charge enough to cover costs. In that case, production ceases even if it benefits society. Hence, markets fail under increasing economies of scale.

Historically, several services necessary to running a modern economy were considered to have increasing economies of scale. Such services were often thought of as natural monopolies, because free markets would create monopolies from them. They included telephone and other telecommunications services, postal services , and electrical and water utilities. From the early 1980s, however, the proposition of increasing economies of scale was challenged for those types of services.

Public goods

Public goods are socially beneficial but are almost never produced by free markets. Three attributes of a good render it public. One is that no person can be excluded from using the good ( nonexcludability ). Another is that one person using it does not prevent another from using it ( nonrivalry). The final attribute is that no person can reject using the good ( nonrejectability). When a good has these attributes, no single individuals will pay for the good unless they gain so much utility from it that they can pay for the entire cost of producing it. This is because individuals can enjoy the good without paying for it—they can “ free ride ” on those who pay for it and “shirk their duty” to pay without losing the good. So in all but exceptional cases, public goods will not be produced by the private market, even though substantial parts of society benefit from having them.

Classic examples of public goods are streets , parks , national defense, broadcasts , and lighthouses . To use national defense as an illustration, whether or not citizens pay for it, the national armed forces will provide defense for them. Foreign invasions are denied, providing a benefit to each individual. But because individuals benefit regardless of whether they pay, few are likely to pay if they have a choice. If defense were a good in the market, it would earn no revenue, because no one would have to pay to enjoy it. But providing defense is costly, so no producers would undertake the task, because they could not make money doing so. The market would then fail. There would be no national defense, even though such defense is arguably socially optimal because it deters armed invasion.

Externalities

When goods are produced, they may create consequences that no one pays for. Such unaccounted-for consequences are called externalities. Because externalities are not accounted for in the costs and prices of the free market, market agents will receive the wrong signals and allocate resources toward bad externalities and away from good externalities.

Good externalities are consequences that benefit society. However, because those benefits are not accounted for in the price of the good, the price is higher than it should be, and too little of the good is consumed and produced. Bad externalities harm society. However, because the costs of those externalities are not accounted for in the price of the good, the price is lower than it should be, and too much of the good is consumed and produced. In both cases, the market has failed to reach efficiency, because it has allocated resources and production without considering the externalities.

Classic examples of bad externalities include industrial pollution and traffic congestion. Industrial pollution has harmful effects on people and the environment. Yet the cost of producing goods does not include the cost of dealing with the effects of pollution. This means that, in the free market, producers are responding to costs that are too low, and consumers are facing prices that are too low. More goods are produced and sold in the free market than should be, given the negative social effects of pollution.

An example of good externalities is private home renovation. Renovation has a beneficial effect beyond the renovated home, because it increases property values in the neighbourhood. But such benefits are not included in the home owners’ calculations in a free market, because their neighbours do not pay them to renovate. As a result, fewer home owners renovate in the free market than the beneficial social effects would justify.

In practice, the discovery of market failure helped arguments for sustaining government production, expanding social welfare programs, and market regulatory action in the 1960s and ’70s. If the goal is to achieve social efficiency and if markets cannot provide it alone, the next step is to find a supplement to help the market or even to replace it as the means of distributing resources. The common thread in many polities was to remedy market failure with government-based initiatives.

Government has significant capacities that have been applied to counter market failure. Public goods can be produced by the government for the benefit of all citizens. Government can impose and collect taxes to pay for the goods so that no free riders or duty shirkers can sustain their behaviour. The government can impose costs for negative externalities through taxes or fees on individual producers and consumers and encourage positive externalities through tax breaks or subsidies for the market agents. Monopolies can be regulated to limit price excesses or production can be encouraged through subsidies when a product has increasing economies of scale.

Welfare services, including education, child care, elder care, and health care, are considered by many welfare theorists as sectors where markets fail. Suboptimal distribution of access to these services in free markets is most often at the heart of these arguments. Here the suboptimal outcomes may be that some citizens cannot access welfare services or that the welfare service levels available are not the same for all citizens. In place of markets, government can mandate or directly provide access for all citizens, and it can regulate or directly produce the desired level of service.

The post- World War II era saw dramatic expansions of government-based welfare service programs in most industrialized countries. The extent and character of programs vary considerably. But common to them is that they have constituted a major part of government activity, including spending and public employment, since the late 1960s in even the least expansionary countries, such as the United States . This scale and scope have made welfare programs a prime target for government reformers, fiscal conservatives, and critics of welfare economic theory.

Market Failure in Context: Introduction

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Alain Marciano , Steven G. Medema; Market Failure in Context: Introduction. History of Political Economy 1 December 2015; 47 (suppl_1): 1–19. doi: https://doi.org/10.1215/00182702-3130415

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Market failure, conceived of as the failure of the market to bring about results that are in the best interests of society as a whole, has a long lineage in the history of writings on matters economic. The goal of the present volume is to explore the contexts within which “modern” (i.e., twentieth-century) notions of market failure were developed. The idea that markets could fail to perform in ways that best promoted the larger interests of society is as old as economics itself, and the question of the appropriate scope to be given to private action and to its collective alternative is one of the most crucial issues with which economic thinkers have had to grapple. Nevertheless, our understanding of the contexts—social, political, and intellectual—in which discussions and debates about market failure have played out remains limited and imperfect. It is our hope that the present volume will go some way toward addressing this lacuna, both directly and by stimulating additional scholarship exploring this important facet of the history of economics.

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Market Failure

The inefficient distribution of goods and services in the free market

What is Market Failure?

Market failure refers to the inefficient distribution of goods and services in the free market. In a typical free market, the prices of goods and services are determined by the forces of supply and demand , and any change in one of the forces results in a price change and a corresponding change in the other force. The changes lead to a price equilibrium.

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 Failures

Market failure may occur in the market for several reasons, including:

1. Externality

An externality refers to a cost or benefit resulting from a transaction that affects a third party that did not decide to be associated with the benefit or cost. It can be positive or negative. A positive externality provides a positive effect on the third party. For example, providing good public education mainly benefits the students, but the benefits of this public good will spill over to the whole society.

On the other hand, a negative externality is a negative effect resulting from the consumption of a product, and that results in a negative impact on a third party. For example, even though cigarette smoking is primarily harmful to a smoker, it also causes a negative health impact on people around the smoker.

2. Public goods

Public goods are goods that are consumed by a large number of the population, and their cost does not increase with the increase in the number of consumers. Public goods are both non-rivalrous as well as non-excludable. Non-rivalrous consumption means that the goods are allocated efficiently to the whole population if provided at zero cost, while non-excludable consumption means that the public goods cannot exclude non-payers from its consumption.

Public goods create market failures if a section of the population that consumes the goods fails to pay but continues using the good as actual payers. For example, police service is a public good that every citizen is entitled to enjoy, regardless of whether or not they pay taxes to the government.

3. Market control

Market control occurs when either the buyer or the seller possesses the power to determine the price of goods or services in a market. The power prevents the natural forces of demand and supply from setting the prices of goods in the market.

On the supply side, the sellers may control the prices of goods and services if there are only a few large sellers ( oligopoly ) or a single large seller (monopoly). The sellers may collude to set higher prices to maximize their returns. The sellers may also control the quantity of goods produced in the market and may collude to create scarcity and increase the prices of commodities.

On the demand side, the buyers possess the power to control the prices of goods if the market only comprises a single large buyer (monopsony) or a few large buyers (oligopsony). If there is only a single or a handful of large buyers, the buyers may exercise their dominance by colluding to set the price at which they are willing to buy the products from the producers. The practice prevents the market from equating the supply of goods and services to their demand.

4. Imperfect information in the market

Market failure may also result from the lack of appropriate information among the buyers or sellers. This means that the price of demand or supply does not reflect all the benefits or opportunity cost of a good. The lack of information on the buyer’s side may mean that the buyer may be willing to pay a higher or lower price for the product because they don’t know its actual benefits.

On the other hand, inadequate information on the seller’s side may mean that they may be willing to accept a higher or lower price for the product than the actual opportunity cost of producing it.

Solutions to Market Failures

In order to eliminate market failures, several remedies can be implemented. They include:

1. Use of legislation

One of the ways that governments can manage market failures is by implementing legislation that changes behavior. For example, the government can ban cars from operating in city centers, or impose high penalties to businesses that sell alcohol to underage children, since the measures control unwanted behaviors.

2. Price mechanism

Price mechanisms are designed to change the behavior of both the consumers and producers. For products that cause harm to consumers, the government can discourage their consumption by increasing taxes . For example, taxes on cigarettes and alcohol are periodically increased to discourage their consumption and reduce their harmful effects on unrelated third parties.

Additional Resources

Thank you for reading CFI’s guide on Market Failure. To keep learning and advancing your career, the following CFI resources will be helpful:

• Economic Inequality
• Negative Externality
• Pigouvian Tax
• Rent-seeking
• See all economics resources
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Market Failures and Their Reasons Essay

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Introduction

Externalities and market failure, public goods, natural monopoly, information asymmetries.

Bibliography

Market failure in some industries is caused by complex political, economic and social factors that affected an industry. The theoretical models provide numerous lessons about the macroeconomic effects of global changes and their impact on a particular market. To the extent that the higher current account deficits and surpluses matching increased capital flows reflect differences between domestic investment over domestic saving, the external balances themselves should not be considered problematic, in and of themselves (Cowen 1988). The main causes of market failure involve:

• Externalities,
• Public goods,
• Information asymmetries,
• Natural monopolies or decreasing cost industries.

Each of these reasons has a separate impact on industry and market and is involved in complex global processes that affected the external environment of every industry.

Externalities can be explained as tangible units which are not charged for in the price system. The growth of industries and cities placed a tremendous burden on the environment by introducing pollutants such as pesticides, radioactive isotopes, and heavy metals into the air, land, and water. There are now approximately seventy thousand different chemicals in the marketplace, and new ones are being produced at an accelerating rate. In addition, the use of precious supplies of energy and materials for luxuries such as motorboats, air conditioners, and hair dryers has added more stress to the environment (The Stern Report 2008). These items deplete limited resources of raw materials necessary to make such products, as well as the depletion of “clean air” in the environment. The use of natural resources at a rate higher than nature’s capacity to restore itself will result in the pollution of air, water, and land. from the standpoint of the environmental crisis. This has a direct impact on the market performance of companies and their profitability (Mankiw 2006). The Kyoto protocol prevents many industries to compete and demanding further changes, The transboundary movements of pollutants lead to unusual and complex economic and political difficulties. Individuals in one nation may suffer economic loss and health hazards as a result of the pollution that originated in another nation, yet they may not benefit from the economic activity that caused the pollution (Pindyck and Rubinfeld 2000). On the other hand, a nation or jurisdiction that acts to minimize pollution that is being transported over hundreds of miles may gain little local environmental benefit. Externalities led to market failure in pharmaceutical and chemical industries depended upon regulations but dumped tons of toxic waste into the air. The effects of pollutants can be immediate (acute toxicity). The case of the pharmaceutical industry vividly portrays possible life-threatening effects that come from toxic pollutants and ineffective waste management. The toxic effect is produced by exposure of a continuing and prolonged nature. Of concern are delayed toxic reactions, progressive degenerative tissue damage, reproductive toxicity, cancer, mutations, and various other problems (Stiglitz 2001).

Toxic wastes dumped by pharmaceutical plants result in desertification which could also seriously decrease the carrying capacity of the and lands that support human settlements and wildlife. Desertification is the process of productive environments becoming increasingly desertlike. It is characterized by the lowering of water tables, a shortage of surface water, the salinization of existing water supplies, and wind and water erosion. In arid and semiarid regions the main cause of desertification is the overuse of land, resulting from overgrazing, over-drafting (mining) of groundwater for agriculture, poorly managed irrigation, the use of soils with poor drainage, and the choosing of crops and employment of agricultural practices that neglect soil conservation. Their only option is to overharvest arid and semiarid areas for fuel and food. This is caused by the scarcity of suitable land and capital, which are essential to providing for their families. The concern for protecting these vulnerable areas, although they will not be affected for a decade or two, appears understandably small to these peasants compared with the value of feeding their families today; therefore, conservation is left to be a concern only for those few altruistic individuals who are not starving (Winston 2006).

The main problem of public goods is that they are non-rival and non-excludable goods. Global public goods are international financial stability, environmental sustainability and infectious disease control (Cowen and Crampton 2002). In contrast, the present framework is comprised of numerous supranational economic institutions, such as the Bank for International Settlements, the World Trade Organisation, the International Monetary Fund, the World Bank and other United Nations-affiliated bodies. Generally speaking, these institutions advocate compatible, pro-globalization objectives. Indeed, a major rationale for these organisations, most of which under one guise or another has been operating for over half a century, is to encourage and facilitate increased global exchange (Mankiw 2006). Yet, further scope remains for integrating international goods, services and asset markets. For instance, trade-to-GDP ratios is still relatively small for many economies in the world, including large economies like the United States and Japan. Moreover, most of the investment that occurs in national economies is still funded by domestically generated savings, suggesting considerable potential remains for exploiting the gains from global finance (Winston 2006).

The pharmaceutical industry creates new demands and shifts public goods to the global market. Several factors stimulate acceptance of the marketing philosophy (Mankiw 2006). It supports AIDS programs and disease prevention around the globe. Among them are these: (1) increased production capabilities in an economy of abundance, coupled with a lack of ready-made markets to consume the goods and services produced; (2) keenly competitive conditions that force greater attention on consumers and consumption; (3) the “profit squeeze” resulting from increased costs and competitive prices, which narrow profit margins; (4) the automation of manufacturing systems which, bringing high fixed costs and continuous production capability, require mass markets to spread them; (5) the recognition of the role of innovation and the contribution of new products to corporate growth and survival; (6) the growth of mergers and multinational corporations that recognize the need for better market planning and coordination; and (7) the development of mass markets with widespread discretionary spending power, thereby providing an opportunity for developing new products to meet consumer wants and needs (Cowen and Crampton 2002).

A monopoly must depend upon some difficulty, either natural or artificial, which stands in the way of new firms entering a trade. In conditions of free entry, if demand increases, so that price exceeds the cost, abnormal profits are made and these abnormal profits will attract new firms into the industry until profits are again reduced to the normal level (Mankiw 2006). Monopoly profits can only continue to be made if for some reason they do not succeed in attracting new capital into the industry. With the nature of these obstacles, we are not here concerned. But it may well happen that though new firms which come in cannot at once secure the custom of all purchasers who are paying prices above those at which they are able to sell similar goods, they can obtain the custom of some of these. In this case, new firms will enter the industry, so soon as the increase of demand is sufficient to attract them, and we must make allowances for this in our calculations (Cowen and Crampton 2002). Natural monopoly involves decreasing the cost of the entire output range. The pharmaceutical industry establishes a monopoly on some drugs certified by FDA. This industry will be in equilibrium if at the ruling price, there is a tendency neither for the total of the industry’s output to be expanded nor to be contracted. But any expansion may be the consequence either of an increase of output by existing firms, or of an addition to the number of firms, or of both (Mankiw 2006). The conditions of equilibrium must therefore be two. First, that each firm shall be in such equilibrium that it shall have no tendency to expand its output. Second that the firms shall be making only such profits that the number of firms in the industry will remain constant. The firm, we have seen already, is in equilibrium when marginal revenue is equal to marginal cost. At that point, neither expansion nor contraction can increase its profits. The industry is in equilibrium when firms are making such profits that there is no incentive to alter. The case of the electricity market shows that this situation can lead to market failure and breakdown (Cowen 1988).

Now it is obvious that it may well happen that marginal revenue is equal to marginal cost, but that price is greater than average cost. This in fact is the normal condition of the monopolist (Mankiw 2006). New firms, we have seen, will come in, if they are free to do so. The effect of the new firms coming in is to change the amount demanded from each of the old firms at any given price, and probably also the elasticity of demand. This change in the conditions of demand for the individual firms will alter the marginal revenue of the firm and will destroy the equilibrium between marginal revenue and marginal cost (Cowen and Crampton 2002). The firm will proceed to adjust its output to the new conditions as successive new firms enter the trade so that at each point marginal revenue is equal to marginal cost, but the consequent profits will gradually fall and it will gradually achieve the double condition of equilibrium (Pindyck and Rubinfeld 2000).

Information asymmetries are often cited as the main reason for market failure. The main problem for marketers is that they take into account advantages and opportunities proposed by the industry but do not take attention to disadvantages and threats. Adverse selection and market signalling, moral hazard and principal-agent problems lead to market asymmetry (Mankiw 2006). For the pharmaceutical industry, often the assessment of market opportunity is achieved through test markets. Yet this can be a hazardous route. The selection of test areas representative of future markets and the development of a normal marketing environment are difficult to achieve (Cowen and Crampton 2002). Though testing fundamentally new products are complicated, tests do provide much valuable information about product acceptance and the effectiveness of alternative strategies. Simulation is a mathematical technique that companies may find useful in assessing the market opportunities. It can provide a means for testing the profitability of available alternatives, thereby providing insight into future operations. The assessment of market opportunity emphasizes that business ventures begin with a study of the market, that the future of the business rather than it’s present or past is the most significant dimension, and that every company must commit itself to change and innovation (Winston 2006). Continuous assessment stresses that management does not focus on products or processes that it now possesses (Cowen 1988). Rather, management becomes concerned with satisfying changing consumer wants and needs and continuously adjusting company resources to that end. This necessitates translating the sales forecast into a specific market, customer, product, territory, and volume goals to be realized during some future period. Thus, the sales forecast becomes the foundation for marketing programs, financial budgets, purchasing plans, personnel budgets, production schedules, plant and equipment demands, expansion programs, and other aspects of management programming (Mankiw 2006).

That is a question regarding which the economist will inevitably have views, but on which he has no more claim to the final word than have other experts in politics, in ethics, or in religion. The industry can usefully produce for consideration the arguments which may be employed to support or to deny the claims of market failures to improve the efficiency of the economic system regarded, first, as a means of organizing the technical production of material goods, second, as a means of securing that those goods are produced in the amounts that are desirable, third, as a means of distributing to individuals the incomes which it is proper that they should enjoy. The case of pharmaceutical inductees shows that international financial flows accompanying financial globalization can change current account imbalances, interest rates, exchange rates, national expenditure, output, employment and inflation in host economies.

Cowen, T. The Theory of Market Failure: A Critical Examination . George Mason Univ Pr, 1988.

Cowen, T., Crampton, E. Market Failure or Success: The New Debate . Edward Elgar Publishing Ltd, 2002.

Mankiw, M.G. Worth Publishers; Sixth Edition edition, 2006.

Pindyck, R. S. Rubinfeld, D. L. Microeconomics . Prentice Hall; 5th edition, 2000.

The Stern Report : 2008. Web.

Stiglitz, O. Climate Change . 2001. Web.

Winston, C. Government Failure versus Market Failure: Microeconomic Policy Research And Government Performance. Brookings Institution Press, 2006.

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Negative Externalities

• Negative externalities occur when the consumption or production of a good causes a harmful effect to a third party.

Examples of negative externalities

• Loud music . If you play loud music at night, your neighbour may not be able to sleep.
• Pollution . If you produce chemicals and cause pollution as a side effect, then local fishermen will not be able to catch fish. This loss of income will be the negative externality.
• Congestion . If you drive a car, it creates air pollution and contributes to congestion. These are both external costs imposed on other people who live in the city.
• Building a new road . If you build a new road, the external cost is the loss of a beautiful landscape which people can no longer enjoy.

The externalities of driving a car to work

• The personal cost of driving are buying car, petrol, your time
• The negative externalities are – pollution to other people, possible accident to other other people, and time other people sit in traffic jams

Social cost

• Social cost is the total cost to society; it includes both private and external costs.
• With a negative externality the Social Cost > Private Cost

Negative production  externality

• When producing a good causes a harmful effect to a third party. Therefore the social cost is greater than the private cost.

Examples of negative production externalities

• Burning coal for energy creates pollution.
• Producing conventional vegetables with pesticides causes carcinogens to get into the environment.
• Producing beef in South America involves cutting down Amazon rainforest, which has an impact on global climate and local environment

• Because of the external costs the social marginal cost is greater than the private marginal cost.
• In a free market, producers ignore the external costs to others. Therefore output will be at Q1 (where Demand = Supply).
• This is socially inefficient because at Q1 – SMC> SMB
• Social efficiency occurs at Q2 where Social marginal cost = Social marginal benefit

The red triangle is the area of deadweight welfare loss. It indicates the area of overconsumption (where SMC is greater than PMC)

Negative externality of consumption

This occurs when consuming a good causes a harmful effect to a third party. In this case, the social benefit is less than the private benefit.

Examples of negative externalities of consumption

• Consuming alcohol leads to an increase in drunkenness, increased risk of car accidents and social disorder.
• Consuming loud music late at night keeps your neighbours awake.
• Consuming cigarettes causes passive smoking to others in the vacinity.

Diagram of negative externality in consumption

• In a free market, we get Q1 output. But at this output, the social marginal cost is greater than the social marginal benefit.
• The red triangle is the area of dead-weight welfare loss.
• Social efficiency occurs at a lower output (Q2) – where social marginal benefit = social marginal cost.

Implications of negative externalities

If goods or services have negative externalities, then we will get market failure. This is because individuals fail to take into account the costs to other people.

To achieve a more socially efficient outcome, the government could try to tax the good with negative externalities. This means that consumers pay close to the full social cost.

See: Tax on negative externalities

Economists on negative externalities

Arthur Pigou 1920 introduced the concept of externalities in The Economics of Welfare. Pigou used the example of alcohol having external costs, such as creating more demand for police and health care.

In 1975 William Baumol and W. Oates provided a comprehensive review of the literature on externalities in Theory of Environmental Policy . In particular, they applied economic concepts of externalities to the emerging issue of environmental costs. For example, in 1975, they mentioned some of the environmental costs which were considered to be pressing.

a. Disposal of toxic wastes, b. Sulfur dioxide, particulates, and other contaminants of the atmosphere, c. Various degradable and nondegradable wastes that pollute the world’s waterways, d. Pesticides, which, through various routes, become imbedded in food products, e. Deterioration of neighborhoods into slums, f. Congestion along urban highways, g. High noise levels in metropolitan areas

• Pros and cons of a carbon tax
• Tax on negative externality
• Positive externality
• Demerit good

Last updated: 10th July 2019, Tejvan Pettinger , www.economicshelp.org, Oxford, UK

THE REASONS FOR AND CONSEQUENCES OF MARKET FAILURES GRADE 12 NOTES - ECONOMICS STUDY GUIDES

• Key concepts
• The reasons for market failures
• Consequences/effects of market failures
• Cost-benefit analysis (CBA)

Markets can fail for many reasons. The reasons for, and consequences of, market failure are explained in this Topic.

8.1 Key concepts

These definitions will help you understand the meaning of key Economics concepts that are used in this study guide. Understand these concepts well.

8.2 The reasons for market failures

There are many reasons for market failure. These include: 8.2.1 Externalities Externalities are costs not included in the pricing of goods/services, and consequently there is a difference between the private costs/benefits and the social costs/benefits of production.

• Private costs: the cost of producing the good or service which translates into the prices that consumers pay. Also called internal costs.
• Private benefits: Internal benefits that accrue to those who produce goods and buy these goods, e.g. producing a bicycle (for producer) and using the bicycle (consumer).
• Social costs: these are total costs incurred by society as a whole. For example the social cost of electricity includes the cost of capital, labour, inputs and the cost of the externalities such as dirty water and air. Social cost = private costs plus external costs.
• Social benefits: this includes the total benefit experienced by society as a whole. For example, municipalities provide clean water to society which results in fewer illnesses. Social benefits = private benefits plus external benefits.

Negative externalities are things like pollution, tobacco smoking and alcohol abuse. The costs of negative externalities are paid by society rather than by the producers. For example, Styvesant produces cigarettes, many illnesses are related to smoking. The treatment for these illnesses is paid for by society. Positive externalities are the positive effects of products to third parties which are not paid for. Negative externalities are often over-produced while positive externalities are under-produced. This leads to market failure. 8.2.2 Missing markets Markets are incomplete because they cannot meet the demand for certain goods. Public goods (community and collective goods) are in high demand but are not supplied by the market because of the low profit gained from them and the high cost of capital needed to supply them. Since private producers cannot withhold these goods for non-payment, they are reluctant to provide these goods. The government thus provides these goods and services. Public goods This includes community and collective goods and has two features:

• Non-rivalry: Consumption by one person does not reduce consumption by another individual, e.g. a lighthouse.
• Non-excludability: Consumption can’t be confined to those who pay for it (free riders can use them), e.g. radio and television.

When you buy a product in a polystyrene container, this gives rise to a negative externality – pollution! This is a form of market failure. In addition

• Social benefits outstrip private benefits: e.g. health care and education.
• Non-rejectability: Individuals are not able to abstain from consumption, e.g. street lighting.
• Continuous consumption. E.g. traffic lights.

Community goods These are goods such as, defence, police services, prison services, street lighting, flood control, storm water drainage and lighthouses. Collective goods These are goods such as parks, beach facilities, streets. Markets are incomplete and cannot meet the demand for all goods. Government provides public goods, which consist of: Merit and demerit goods

• Merit goods: These are highly desirable for general welfare, but not highly rated by the market, e.g. health care, education and safety. If people had to pay the market price for them, very little would be consumed. The market fails because the market produces less than the desired quantity.
• Demerit goods: These are over-consumed goods, e.g. cigarettes, alcohol and drugs. Thus more of the good is produced than is socially desirable. The government bans or reduces consumption of these products through taxation, and provides information to the population on their harmful effects.

8.2.3 Imperfect competition

• Competition in market economies is limited by the power of certain producers to prevent new businesses from entering the market. This is imperfect competition.
• Barriers to entry are created because of advertising, a lack of capital and the controlling of resources.
• The imperfect market doesn’t allow for price negotiations.
• Advertising is used to promote producer sovereignty (dominance), which encourages consumers to buy existing products and allows producers to delay new products from entering the market until it is in their own interest (e.g. businesses have had the technology to produce long-life light bulbs for many years but have chosen not to launch them in the market).

8.2.4 Lack of information Consumers, workers and entrepreneurs do not have the necessary information to make rational decisions. This results in resources not being allocated efficiently.

• Consumers: To maximise their benefits, consumers need detailed information about goods and services. Although technology offers this to the consumer, they obviously do have perfect information.
• Workers: Are often unaware of job opportunities.
• Entrepreneurs: Lack of information on costs, availability and productivity of factors of production impacts their effectiveness.

Merit and demerit goods relate to desirability of use 8.2.5 Immobility of factors of production

• Labour takes time to move from one area to another.
• The supply of skilled labour cannot be increased because of the time it takes to be trained or educated.
• Physical capital, like factory buildings or infrastructure such as telephone lines cannot be reallocated easily.
• Structural changes like a change from producing plastic packets to paper packets or shifting from labour-intensive production to computer based production requires a change in labourers’ skills, employment and work patterns. This takes time to change.

8.2.6 Imperfect distribution of income and wealth

• Income distribution: The market system is neutral on issues of income distribution.
• Discrimination: Distorts earnings for women and minority groups, disabled persons and people subject to illness and incapacity.
• The market produces goods and services only for those who can afford it.
• This leads to some people having too many goods while others have too few goods.
• The difference in income occurs because there is a difference in market power, unequal educational opportunities, discrimination and inheritance.

The market can be efficient but not necessarily fair or equitable

8.3 Consequences/effects of market failures

8.3.1 Inefficiencies Two kinds of inefficiencies are possible:

• Productive inefficiency/Technical inefficiency When resources are not used appropriately to produce the maximum number of goods at the lowest cost and best quality.
• Allocative inefficiency Allocative inefficiency means that the types/quantities of goods or services produced are not what is best for consumers.
• The Production possibility curve (AA), above, shows a combination of goods that can be produced using all the available resources.
• Any point on the curve shows a combination of goods where resources will be used efficiently.
• Therefore any point on the curve indicates Productive/Technical efficiency.
• The indifference curve (I1) shows a combination of two goods which gives the consumer the same level of satisfaction. However, if production takes place at point B on the curve, but the demand for goods is actually represented by point C, Allocative inefficiency will occur where the tastes of consumers are not met.
• Any point to the left of the curve such as D, indicates that some resources are unused. If this occurs some customers may be deprived of goods. This depicts Allocative and Productive inefficiency.
• The demand for the cigarettes is represented by DD.
• The supply of the product, which is also the marginal private cost (MPC) of the industry, is represented by SS.
• As a result of the pollution, the marginal social cost (MSC) is greater than MPC.
• If the market is left to its own devices, a quantity Q will be produced at price P.
• This is a socially inefficient solution.
• Social efficiency requires that MSC be equal to the price of the product.
• This occurs at price P1 and quantity Q1.
• Fewer goods should be produced at a higher price.
• The shaded angle represents the negative externality (welfare loss) to society.

The government has used three methods to reduce negative externalities:

• The government has carried out campaigns in order to change/ persuade people from causing negative externalities.
• Levying taxes on goods that cause negative externalities. E.g. Taxes are levied on cigarettes and alcohol.
• Passing laws and regulations to prevent activities that cause negative externalities. E.g. Tobacco companies are not allowed to advertise. There are laws that regulate the amount of air pollution and waste.
• The supply of education, which is also the marginal social cost, is represented by SS.
• The demand for school education, which is also the marginal private benefit (MPB) of the industry, is represented by DD. The cost of school fees is P and the quantity demanded and supplied is Q.
• If the cost of school fees is P, most learners will not be able to afford it.
• The demand curve D 1 D 1 also represents the marginal social benefit. (MSB), that is, the level of education that should be demanded.
• As a result of the benefits of education, MSB is greater than MPB.
• There would be social inefficiency in the market since not enough education is being demanded.
• However, if social benefits are acknowledged, a quantity Q 1 will be produced at price P 1.
• More education would be demanded, this will lead to social efficiency.
• The shaded angle represents the positive externality (the welfare gain) to society.

The government encourages positive externalities by:

• Advertising on the radio or television.
• Providing education, health care and other services at a low cost or free.
• Providing consumer subsidies.
• Consumer subsidies lower the cost of a good and encourage its usage.

8.3.3 Government intervention Rules and regulations

• Direct controls The government can pass laws or use existing legislative framework to control businesses that generate negative externalities.
• Imperfect markets Firms in an imperfect market supply a limited quantity of goods and services at a very high price. The government uses its laws on competition to prevent exorbitant prices charged by firms, to ensure entry to the market is free, prevent harmful collusion and encourage foreign competition which helps keep prices of goods low.
• When the government enforces a minimum wage, it means workers have to be paid a certain wage amount and not anything less than this.
• The Figure 8.4 below shows that if the wage rate is set at W, the corresponding demand and supply of labour will be Q.
• If a minimum wage of W 1 is set, the demand for labour will decrease from Q to Q 1. Some people may become unemployed due to the introduction of a minimum wage.
• However, the quantity of labour supplied will increase from Q to Q 2 .
• The government sets a maximum price ceiling below the market price to make goods more affordable.
• Maximum prices allow the poor greater access to certain goods and services.
• A maximum price is set on goods such as basic foods, housing and transport.
• Initially the market equilibrium price is P and equilibrium quantity is Q.
• The government intervenes and passes a law that milk cannot be sold for more than P 1.
• The effect of this maximum price is that quantity supplied decreases to Q 1 and quantity demanded increases to Q 2.
• There is a shortage of milk equal to the difference between Q 1 and Q 2.
• A shortage creates a problem of how to allocate milk to consumers. Black markets often develop where people can obtain milk. A black market is an illegal market in which either illegal goods are bought and sold or illegal prices are charged.
• Maximum prices may cause a shortage of goods but they do improve the welfare of some consumers since goods can be purchased at lower prices.
• The government sets a minimum price at some point above the market price.
• Consider the market for wheat.
• The market equilibrium price is P and the equilibrium quantity is Q.
• If the government sets a minimum price at P 1, farmers will be earn greater profits and supply more wheat. Quantity supplied will therefore increase to Q 2.
• However, quantity demanded will decrease to Q 1.
• There would be a surplus of wheat equal to the difference between Q 2 and Q 1.
• A surplus means the government will have to buy the extra wheat and dump it locally or abroad.
• Although minimum prices may cause a surplus they do encourage the supply of important food stuffs.
• The government provides subsidies to producers in order to encourage them to increase the production of goods. Supply increases.
• Producer subsidies are often given to suppliers of agricultural products such as milk, wheat and maize.
• The market price of rice is P and the corresponding quantity is Q.
• If the government subsidises the production of rice, the market price will decrease to P 1 with corresponding quantity Q 1 .
• The lower price, P 1 , allows the poor to purchase more rice.
• Traditional methods e.g. the levying of various taxes and the provision of free services, services in kind and cash benefits to the poor.
• Implementing Redress methods e.g. the use of law to enforce redistribution. It includes BEE, affirmative action, empowerment, land restitution, land redistribution and property subsidies (for RDP houses). The government can use other ways to improve income distribution and overcome market failure:
• Transfers income directly to the poor e.g. child support grants, unemployment benefits etc.
• Provides goods free of charge e.g. community goods, education etc. Implements employment creation programmes e.g. public works programme.
• Subsidising merit goods e.g. subsidising arts and cultural events. Imposes taxes and laws on demerit goods to discourage consumption.
• Uses fiscal and monetary policy to achieve macroeconomic stability.
• Makes sure that consumers are informed about products through legislation. The South African Bureau of Standards (SABS) checks consumer goods in South Africa.
• Tries to prevent misleading advertising. (Advertising Standards Authority)

8.4 Cost-benefit analysis (CBA)

8.4.1 Description In both private and public sectors project evaluations are done in terms of cost and benefits. In the private sector feasibility studies are done which also provides for legal aspects relating to externalities. Expected private costs and benefits are taken into account. In the public sector a Cost Benefit Analysis is done which takes into account expected social costs and social benefits of providing such goods and services. Learn these three points about cost benefit analysis. 8.4.2 Reasons for cost benefit analysis

• Market signals e.g. price help to allocate resources through demand and supply.
• Goods supplied by the government such as roads, bridges etc. are provided free.
• With the absence of market signals, decisions on the desirability of a project may be subjective.
• Objective criteria may be required to ensure economic efficiency in resource allocation.
• CBA brings greater objectivity to decision making.
• This is done by identifying all the relevant benefits and costs of a project so that an informed decision can be made.

8.4.3 Applying the CBA (an example) CBA is usually applied to projects where it is expected there will be a significant difference in private and social costs and benefits. Imagine the Gautrain project, a rail service that connects Hatfield in Tshwane with Johannesburg and the OR Tambo International Airport.

• What economic technique for enumerating and evaluating is depicted in the illustration? (2)
• Give TWO recent examples of potential ‘operations’ in South Africa that will fit into the illustration. (2)
• List ONE social benefit of each of the above projects. (4) [8]

Activity 2 Distinguish between merit and demerit goods. [8]

Activity 3 Discuss the features of collective goods. [8]

Activity 4 Discuss the distribution of wealth and income as a consequence of market failure. [8]

• Identify the negative externality depicted in the illustration. (2)
• List TWO measures that can be applied by government to reduce this externality. (2)
• What is the liability of the factory in this regard? (2)
• What effect will this have on consumer prices? (2) [8]

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Sample Economics Essay Questions – Market Failure

JC Economics Market Failure Essay Questions

Are you preparing to attempt the Market Failure essay question for your upcoming Prelims or eventual GCE A-Level Econs exams ? Good, as this is your best bet to secure that elusive grade “A” for H2 students! Focusing on essays on Market Failure and looking through a list of questions one or your H2 Econs (9757 Syllabus) will help you to filter the most important content knowledge you will need in JC Economics exams.

Here is the listing of Market Failure essay question list:

1 Many cities and countries are embarking on new cultural projects. Presently, government spending in these areas in Singapore is below those of similar size metropolis such as Hong Kong, which is also providing sizeable amount of land for development of arts and entertainment district.

(a) Explain why government intervention is advocated in the markets for public goods and goods where externalities are present. [10] (b) Assess the economic case for government intervention in the development of cultural projects. [15] (public goods)

2(a) Explain how market dominance and factor immobility might lead to market failure. [10] 2(b) Assess the extent to which these two forms of market imperfections, rather than any other forms of market failure, is the major cause of government intervention in Singapore. (market imperfections)

Q3. If consumers and producers pursue self-interest and make rational decisions, there is no need for government intervention. Critically examine the above view. [25] (market efficiency and failure)

Q4. Singapore government makes it compulsory and free for every Singapore child to be vaccinated against diseases like poliomyelitis, diphtheria, tetanus and pertussis before the age of 12.

(a) Explain the economic justifications for government intervention in the case of vaccination in Singapore. (b) Discuss whether compulsory vaccination is the best form of government intervention in the market for vaccination in Singapore. [15] (positive externalities & healthcare)

Q5. “In addition to government subsidies, individuals are expected to shoulder a portion of their own healthcare costs. The 3Ms framework – which refers to Medisave, Medishield and Medifund – is Singapore’s healthcare financing approach that incorporates personal responsibility with risk pooling and community support.” (Source: Economics in Public Policies: The Singapore Story 2012)

The Singapore government uses both demand and supply side measures to manage the healthcare market. To what extent can such intervention correct the market failure in the industry? [25] (positive externalities & healthcare)

Q6. “The root cause of market failure is far more often lack of information than externalities, and this is where government should direct their efforts to improve the efficient working of the economy.”

(a) Explain the two types of market failure described above. [10]. (b) Discuss if legislation is the best way for government intervention in the above situations of market failure. [15] (market failure)

Q7. Governments across the world play an active role in intervention, whether to reduce the growing income inequality or to address market failure.

(a) Explain the role of prices in resource allocation in a market economy. [10] (b) Assess whether government intervention in markets is always justified. [15] (market failure)

Q8(a) Use examples to distinguish between i) a private good and a public good (ii) a social benefit and a positive externality. [10] Q8(b) Assess the usefulness of the above concepts in explaining whether it is the government or the private sector that is responsible for the development and operation of key facilities such as airports and seaports. [15] (public good)

Q9(a) Explain why government intervention is advocated in markets with both market dominance and income inequity. [10] Q9(b) Discuss the measures that can be used to address these sources of market failure. [15] (market dominance and income inequity)

Q10. According to the Compulsory Education Act, a child between the age of 6 and 15 years has to attend a national primary school as a pupil regularly, unless he/she has been exempted from compulsory education. Adapted from: MOE Website

Discuss whether the Compulsory Education Act is the most appropriate policy adopted by the Singapore government to achieve an efficient allocation of resources in the education market. [25] (positive externalities & education)

Q11. Explain why congestion caused by cars leads to market failure and assess the extent to which the Singapore government’s policies to address this market failure may need to be adjusted. [25] (negative externalities & congestion)

Q12(a) Explain how market dominance and immobility of factors of production in a country can lead to market failure. Q12(b) Discuss the extent to which globalisation has reduced the problems associated with these sources of market failure. (market imperfections. Market Dominance requires content knowledge of Monopoly, under Market Structures .)

Q13(a) Explain why the markets for public goods and demerit goods fail in each case. [10] Q13 (b) In Singapore, museums offer free entry to Singapore citizens and Permanent Residents. However, New York’s Metropolitan Museum of Art charges a recommended entrance fee of US25. Assess the economic case for these two approaches. [15] (positive externalities & merit goods)

Q14. How far can efficiency in resource allocation be achieved by encouraging competition in Singapore? [25] (market dominance)

Q15(a) Explain why the Singapore government intervenes in the market for healthcare. Q15(b) Discuss whether such intervention is sufficient in view of the changing demographic conditions in Singapore. (positive externalities & healthcare)

Q16(a) Explain how the price mechanism allocates resources efficiently. Q16(b) A government imposes taxes on a variety of goods and services which include alcohol, fuel and some imported goods. Discuss whether taxation would lead to a more efficient allocation of resources. (negative externalities & demerit goods)

Q17. The Chinese government believes it has more information to overcome pollution oversight as well as to ensure a steady transition from low-cost manufacturing to a more service-oriented economy.

(a) Explain how firms’ missing information on costs and immobility of factors of production lead to inefficiency in resource allocation. (b) Assess whether government intervention to address the above problems will lead more efficient resource allocation. (market imperfections)

Q18. Some economists argue that the government achieves the most efficient outcome if they only intervene in the provision of public goods. Discuss this statement with reference to Singapore. (divergence & public good)

Q19. “An exceptionally large number of new homes are currently being built as part of the cooling measures for the housing bubble. The housing bubble benefits no one and hurts many when it bursts. This allocation of land would hopefully moderate housing prices, so that it would remain affordable for most residents.” Source: Housing Policies, Budget Debate Singapore

(a) Distinguish between public and private goods, and determine if public housing is a public good. (b) Using concepts of scarcity, opportunity costs and production possibility curves, discuss if the allocation of land use for public housing is justified. (positive externalities & housing)

Q20. Some governments provide free services, such as internet broadband and healthcare to households, while other governments merely subsidise production of certain goods and services, such as education.

Discuss the extent to which the Singapore government could intervene in the supply of certain goods and services. [25] (positive externalities & subsidise)

Q26(a) Explain why government intervention is advocated in the market for healthcare. Q26(b) Discuss whether healthcare services should be provided free by the government. (positive externalities & healthcare)

Q27. A fast ageing population will put pressure on the government’s budget. Health Minister of S’pore said that the key to a sustainable healthcare system is to minimise market distortions and to allow healthcare to function as normally as other economic activities. (Adapted from Economist Conferences, Healthcare in Asia, 30 March 2010)

Evaluate the extent to which the government should intervene in the market for healthcare in Singapore. [25] (positive externalities & healthcare)

Q28. “Market failure cannot be effectively tackled unless its underlying causes – externalities, lack of information, and irrationality – are accurately identified and understood.”

Using illustrations from S’pore, assess the extent to which government [25] policies have addressed these underlying causes of market failure. [25] (market failure)

Q29. “When governments intervene in markets, they cause more problems than they solve.”

With the use of appropriate examples, assess whether governments should intervene in a market. [25] (government failure)

Q30(a) Explain the term public good, and explain whether public toilets and national defence are examples of public good. [10] Q30(b) Assess the view that public goods & merit goods should be the major causes intervention within SG in achieving its micro economic goals. [15] (public goods, merit goods)

Q31. China’s rapid market reforms had created a strong middle class and a burgeoning industrial sector. However, many lower income earners, mired in a polluted environment especially in the mining and industrial areas, are left behind economically.

(a) Explain how income inequality and pollution are causes of market failure. [10m] (b) Evaluate the possible measures that the Chinese government could adopt to solve these problems. [15m] (negative externalities, inequity)

Q32(a) Explain why market imperfections may lead to an inefficient allocation of resources. [10m] Q32(b) Evaluate the policies currently used by the Singapore government to achieve an efficient allocation of resources with market imperfections. [15m] 

Q33. The level of innovation in free markets is not desirable and thus innovation should be solely carried out by the government. Discuss. [25m]

Q34. Discuss whether the free market is the most efficient way of allocation resources in Singapore. [25m] (Link to answer on allocative efficiency here)

Q35. Globalisation and economic growth has brought about both opportunities and challenges to S’pore. Service related industries which require skilled labour saw healthy growth, while secondary industries which employ unskilled labour were lagging behind and faced with very fierce competition from the region. Some have called for the government to implement minimum wage to address the income inequality between these two groups but others have suggested stepping up efforts to enhance workers’ skills and raising productivity.

(a) Using demand and supply analysis, explain the main cause of income inequality between the skilled and unskilled labour in SG. [10] (b) Assess the effectiveness of implementing minimum wage to address the problem of income inequality in Singapore. [15] (Note: This question is a significant overlap with the topic on Market Mechanism :, as it mostly likely overlaps with the concepts of DD, SS, elasticities, price controls, etc.)

Q36. The government should only intervene in the case of public good provision because too much government intervention is undesirable.” Discuss. [25]

Q37 (a) Distinguish between private goods, demerit goods and public goods. [10] Q37 (b) The police protect the community by deterring and detecting crime as a public service. But the task of guarding specific property like banks and factories is usually left to security firms who charge for such services. Discuss the view that policing services can be left to the private sector. [15]

Q38 (a) Explain why immobility of factors and market dominance may lead to market failure. [10] Q38 (b) Evaluate the policies used by the Singapore government to correct this market failure (13)

Q39 “The free market is the most efficient way of allocating resources in Singapore”. How far do you agree? [25] [Information Failure (Merit and demerit goods, asymmetric info), Externalities, Market Dominance, etc]

Q40. Discuss with suitable examples, whether the Singapore government currently adopts the most ideal economic policies in the provision of healthcare / housing / education. (25) (Policy measure for Externalities, 3M framework for healthcare financing in SG )

Q41. To what extent do you agree that the free market is capable of allocating resources efficiently in the case of air travel and museum visits? [25]

Q42. The Cabinet has decided to develop two Integrated Resorts (IR) in Singapore comprising museums, convention spaces, theme parks and casinos. The Singapore government continues to be involved in the development and operation of the IR, including the building up of infrastructure supporting the IR and controlling access to the casino.” Adapted from PM Lee Hsien Loong Parliamentary Seating, 18 April 2005

(a) Explain the reasons why the government is involved with the development and operation of the IR. [10] (b) Assess the view that public goods and merit goods are the major causes of government intervention in Singapore. [15]

Q43. In a market economy, prices act as a rationing device, provide incentives and give signals to producers and consumers. The price mechanism is the best way to allocate resources.

(a) Explain how the rational behaviour of consumers and producers lead to an efficient allocation of  resources. (b) Critically analyse whether the price mechanism is the best way to allocate resources.

Q44. Assess the view that the Singapore government should use taxes rather than any other economic policies when dealing with the market failure associated with negative externalities. [25]

Q45(a) Explain how the price mechanism allocates scarce resources among competing needs in a free market. [10] Q45(b) Discuss whether it is necessary for the Singapore government to provide both public and merit goods in order to achieve efficient allocation of resources. [15]

Q46. The 6% tax on soft drinks and the removal of soft drink machines in primary schools aim to tackle the obesity problem and high government spending on healthcare in the US. In response, the American Beverage Association spent millions of dollars on media to mitigate the effect of the tax.

Discuss the economic rationales and effectiveness of the above government measures, [25]

Q47 How far do you agree with the proposition that economic activity of the Singapore government should be restricted to the provision of public goods and control of market dominance within Singapore? [15]

Q48(a) Explain the main types of unemployment in Singapore. [10].

To reduce income inequality, the USA uses a minimum wage law while Singapore believes that improving the skills of workers is the best solution. Q48 (b) Using economic theory, analyse whether the above view is justified. [15]

Q49 Coal-fired plants produce electricity by burning coal in a boiler to produce steam. In the process, several principal pollutants result from coal such as  sulphur dioxide and nitrogen oxides which contribute to acid rain, haze, and respiratory illnesses. Source: US EIA

Discuss the view that governments throughout the world should be more involved in the supply of electricity, than the control of reducing pollutants from the process of generating electricity. [25] .

As you already know by now, this is a MUST-PREPARE TOPIC QUESTION FOR EACH AND EVERY SINGLE EXAM OF YOURS!! So her at Adam Smith Economics Tuition , we OVER-PREPARE for Market Failure, so that regardless of  how difficult it is, you will be able to conquer it. Be it very obscure and unfamiliar positive or negative externalities, or a combined topic between Market Failure & Market Structures, or between Market Failure & Market Mechanism , we will make sure you will still obtain your Level 3 answer response for this topic.

It may even cross topics with Macroeconomics topics, including the Domestic Economy with Macro Econs Performance or Standard of Living, External Economy such as Balance of Payments, or even the Global Economy including Globalisation and Trade. yes, expect it not to be easy, since practically every JC Econs student will attempt this question! Let us help you overcome this challenge in the shortest time possible.

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Market Failure

Market failure happens when the price mechanism fails to allocate scarce resources efficiently or when the operation of market forces lead to a net social welfare loss.

Market failure exists when the competitive outcome of markets is not satisfactory from the point of view of society.

Market failure refers to a situation in which a market fails to allocate resources efficiently. This can occur for a variety of reasons, such as externalities, lack of competition, or public goods. Some examples of market failure include:

• Externalities: Externalities occur when the production or consumption of a good or service has an impact on third parties that is not reflected in the market price. For example, if a factory pollutes a river, the cost of the pollution is not borne by the factory, but by the people who use the river for fishing or recreation. This can lead to an inefficient allocation of resources, as the factory has no incentive to reduce its pollution.
• Lack of competition: If a market is dominated by a small number of firms, there may be less competition and higher prices for goods and services. This can lead to a misallocation of resources, as consumers may be willing to pay more for a product than it is worth.
• Public goods: Public goods are goods that are non-rival and non-excludable, meaning that one person's use of the good does not reduce its availability to others, and it is difficult to exclude non-payers from using the good. As a result, private markets may not provide an efficient amount of public goods, as there is no way to charge people for their use.
• Information asymmetry: If there is a lack of information about a good or service, or if one side of a transaction has more information than the other, it can lead to an inefficient allocation of resources. For example, if a seller knows more about the quality of a used car than the buyer, the buyer may pay more for the car than it is worth.
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• Asymmetric Information
• Asymmetric information advantage
• Public good
• Local public goods
• Global public goods
• Quasi public good
• Externalities
• Negative externalities

In the News Teaching Activity – the online gambling industry’s impact on the economy (Sept 2024)

16th September 2024

Transport Economics and Market Failure - Ulez Expansion: A Victory for Cleaner Air?

25th July 2024

IB Economics - Lack of Public Goods

Study Notes

IB Economics - Market Failure as a Failure to Allocate Resources Efficiently

In the news teaching activity – is big tech causing environmental damage (may 2024).

3rd June 2024

In the News Teaching Activity – how could funding cuts affect museums ? (Apr 2024)

25th April 2024

Edexcel A-Level Economics (A) Theme 1 Knowledge Organiser

Exam Support

AQA A-Level Economics - Year 12 Microeconomics Knowledge Organiser

Information economics - akerlof and the market for lemons.

Topic Videos

In the News Teaching Activity – Is it time for the UK to build more flood defences? (Jan 2024)

11th January 2024

New Kahoot Quizzes on Market Failure

13th December 2023

Thames Water - Financial Crisis Deepens

In the news teaching activity – lack of competition in the baby milk formula market is adding to the cost-of-living crisis (dec 2023).

4th December 2023

Tragedy of the Commons - Over-harvesting hit Texas oysters

29th November 2023

Government Intervention - Australia Bans Imported Disposable Vapes

28th November 2023

Edexcel A-Level Economics - Theme 1 Knowledge Organiser

8th November 2023

Water Crisis - What went wrong with Britain's water system?

27th October 2023

Market Failure and Government Failure: Could a tax curb meat’s health and environmental problems?

Market and government failure: outright bans on cigarettes, 1.3.3 public goods (edexcel), 1.3.1 types of market failure (edexcel), 4.1.8.3 public and private goods (aqa a level economics teaching powerpoint).

Teaching PowerPoints

Public Bads

De-merit goods - should the government toughen gambling laws.

29th March 2023

Economics of Commercial Bank Bailouts

Market failure and government intervention - the row over london’s ultra-low emission zone.

7th March 2023

Information Economics - Moral Hazard and Adverse Selection

Public goods and market failure - what is the free rider problem, externalities and market failure - the toxic legacy of 3m's 'forever chemicals'.

28th December 2022

Environmental Economics - CO Emissions by Transport Mode

27th November 2022

Energy Price Cap Jumps Again - An Economic and Social Crisis Arrives

26th August 2022

Externalities and Government Failure - Raw Sewage and Britain's Beaches

21st August 2022

Key Diagrams - Negative Consumption Externalities

Key diagrams - negative production externalities, market failure (quizlet revision activity).

Quizzes & Activities

Market Failure - Explaining External and Social Costs

Petrol and diesel cars and market failure - chains of reasoning, market failure - scotland bans single-use plastic.

5th January 2022

Public Goods and Market Failure (Revision Quizlet Activity)

The price mechanism (revision quizlet activity), welfare loss from monopoly pricing, welfare loss from negative production externalities, price discrimination: fca acts to end price gouging of loyal customers.

30th December 2021

Behavioural features of the Xmas toy market

25th November 2021

Pigouvian Taxes - Beyond Meat boss backs tax on meat consumption

3rd August 2021

Education economics - should government intervene to mandate lower tuition fees for local students?

22nd July 2021

Health Economics and Market Failure - Food strategy calls for £3bn sugar and salt tax to improve UK’s diet

15th July 2021

Market failure and government failure - Southern Water dumped raw sewage into sea for years

14th July 2021

Externalities and Market Failure - 2021 Revision Update

Economists advise the football clubs! The failure of UEFA's Financial Fair Play regulations

9th September 2016

Government Failure - Wood Energy Schemes and Climate Change

23rd February 2017

Regressive effects of high-cost credit

25th March 2017

Housing Market Failure (Revision Presentation)

Positive externalities (revision presentation), labour market failure (revision presentation), market failure & government intervention (revision presentation), economics of market failure revision quiz, information failures (revision presentation), factor immobility (revision presentation), de-merit goods (revision presentation), merit goods (revision presentation), wealth and income inequality (revision presentation), monopoly power - as micro (revision presentation), public goods (revision presentation), information economics - the market for lemons, as micro multiple choice: statements about market failure, colour coded as micro answer - potash mining, colour coded exam skills model answer - cigarette market, revision presentation on government failure, positive externalities, information failures in markets, negative externalities and market failure, regulations to address negative externalities, analysis of market failure with merit goods, minimum wages - evaluation (labour markets), oligopoly: evaluating costs and benefits of collusion, evaluating government intervention in markets, evaluating monopoly (as micro), negative production externalities (chain of analysis), public goods and market failure (chain of analysis), introduction to market failure, plastic pollution and market failure, sustainable growth - news update.

12th February 2021

Government intervention: Could new legislation change UK betting firms for good?

1st February 2021

Asymmetric information: Apple pledges to improve transparency on how consumers' data is used by tech industry

28th January 2021

Policies for Market Failure (Online Lesson)

Online Lessons

Government Failure (Online Lesson)

Government failure: would a junk food tax cause government failure, evaluating subsidies (online lesson), introduction to subsidies (online lesson), minimum prices (online lesson), market failure - match up knowledge retrieval activity, market failure and government intervention - head start activity, plastic sachets and negative externalities.

28th February 2020

Rising obesity as a barrier to development

9th February 2020

Unintended consequences: Does a plastic ban harm the environment?

9th January 2020

Sugar (Soda) Taxes (Government Intervention)

Paper 1 micro: top revision videos on market failure and government intervention, market failure and government intervention - clear the deck key term knowledge activity, financial market failure (financial economics), a* evaluation on public goods, a* evaluation on information failures, key micro diagrams (market failure), indirect taxes (government intervention), producer subsidies (government intervention), uk plastic bag charge set to be doubled to 10p.

27th December 2018

Housing Supply (Revision Essay Plan)

Practice Exam Questions

Optimum “health tax” for meat calculated

8th November 2018

External Costs of Pollution from Plastic

Government floats ban on energy drinks for under-18s.

30th August 2018

Alcohol - how vested interests shape policy-making

24th August 2018

Google fined €4.3bn for reducing consumer choice

19th July 2018

Government Intervention - Subsidies

Regulations (government intervention), information failure, government failure, contestable markets, oligopoly - collusion, negative externalities and government intervention, explaining merit goods, analysing and evaluating government intervention in markets, negative externalities, public goods and market failure, barcelona introduces greater regulation on airbnb.

7th June 2018

Micro and Macro Impact of a Plastic Tax (Revision Essay Plan)

Edge revision webinar: market failure and government intervention, farm subsidies (revision essay plan), financial market failure (revision essay plan), sugar taxes, minimum prices for alcohol: evaluation, test 1: a level economics: mcq revision on market failure and government intervention, taxing de-merit goods (chain of analysis), evaluation: a minimum price for carbon, information failure - topical examples.

15th March 2018

Mark Carney gives a short A level Economics lesson on Tragedy of the Commons

9th March 2018

Economics for real, economics for good It’s everyday deal, like life in the hood​

22nd February 2018

Congestion in UK cities - 'Ranking Activity'

6th February 2018

Elasticity of Supply - The Supply of New Housing in the UK

Latte levy - a surcharge for use of takeaway paper cups.

5th January 2018

Plastic Planet - An Economic and Human Crisis

30th December 2017

Negative externalities: The growing mountain of electronic waste

26th December 2017

Seven charts that explain the plastic pollution problem

10th December 2017

Has capitalism become too gentle?

27th October 2017

Deutsche fined again over LIBOR rigging

26th October 2017

De-Merit Goods

Cap and trade systems, complete and partial market failure, evaluating the pub smoking ban.

1st October 2017

What can be done about problem gambling?

1st September 2017

Pollution breaches by farmers on the rise

23rd August 2017

Is work too easy? A new analysis on obesity

24th July 2017

What is Market Failure?

Dominant building firms are breaking the housing market.

29th April 2017

Intervention in Markets - Will the legal highs ban work?

31st May 2016

​Free Markets – Tall Tales, a Macabre Story in the Guardian

9th May 2016

E-cigarettes - Government policy to combat demerit good or government failure example?

28th August 2015

Bacon sandwich with sugar, anyone?

27th October 2015

Market failure and government intervention - revision resource

18th March 2016

​Economics for the Breaking Bad Generation

16th March 2016

​Market Failure and Akerlof’s Lemons

25th February 2016

Ad Blocking - free markets at their best or worst?

3rd March 2016

​The Bots Are Taking Over!

24th February 2016

Information failure, consumer behaviour and prices

11th February 2016

Market Failure and Behavioural Policies - Research Assignment

7th February 2016

Customer satisfaction surveys used to combat possible market failure on the trains

29th January 2016

Flying to Berlin cheaper than a return train journey to London - market failure or market success?

28th January 2016

Market Failure: 8 resources on Market Failure

18th January 2016

25 stories on Market Failure

21st January 2016

The Housing Market - time to start charging builders who fail to build quickly enough?

7th January 2016

Richard Branson on COP21 and Heathrow Airport (and possible conflicts!)

16th December 2015

Market for ivory - prices, market failure and black markets

4th December 2015

Joseph Stiglitz: The State of the Market Explained

3rd December 2015

IPencil and the Rise of Activist Laizzez-Faire

25th November 2015

Alcohol information failure

13th January 2010

Climate Change Policies - Finding the Right Mix

30th April 2012

Cigarettes, demerit goods and government failure

12th July 2013

Information Economics - How Many Sugars in a Coke?

5th January 2014

Scotland introduces a minimum charge for plastic bags

21st October 2014

Obesity - A Global Economic Issue

24th December 2014

Shouting at the supermarkets: is there a better way?

11th February 2015

Joseph Stiglitz - Financial crisis as market failure

16th February 2015

Plain packaging for cigarettes

17th February 2015

CMA targets pay day lenders and comparison websites

24th February 2015

Tuition Fees and Applications for Degrees - New Evidence

1st April 2015

No Jab No Pay Policy in Australia

12th April 2015

De-Merit Goods - Banning Legal Highs

30th May 2015

London Housing Rent Crisis - More Controls Needed?

20th August 2015

Kicking the Habit - Smoking Rates Increasing in 40 Countries

5th September 2015

Preventing sunburn by changing habits

7th September 2015

The Irish potato famine - classic demand and supply

22nd September 2015

HBOS Report - Market Failure and Regulatory Capture

20th November 2015

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