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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:

  1. 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.
  2. 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.
  3. 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.
  4. 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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