Market failure
In
economics, a
market failure is a case in which a
market fails to efficiently provide or allocate goods and services. More generally, market failure refers to situations where market forces do not serve the perceived "public interest." Economists use model-like theorems to explain such cases. The two main reasons that markets fail are sub-optimal market structures and the inability to internalize costs or benefits into prices and thus into microeconomic decision-making in markets.
Examples of the inability to internalize economic costs or benefits into prices include:
Strategies to reduce these imperfections require alternative, non-market, institutions, such as the centralized
government or
state, tradition, and/or
community democracy. These are often studied in the field of
collective action.
Examples of sub-optimal market structures include:\n*
imperfect competition\n**
monopoly\n**
monopsony\n**
oligopoly\n**
oligopsony\n**
monopolistic competition\n* downward sloping longrun average cost curve, i.e.
natural monopoly\n*
price discrimination\n**
price skimming
Some economists, particularly those of the
Austrian School and other
libertarians, dispute whether market failures exist or that the presumed theorems are usuable to justify market interventions. On the other end of the liberal political spectrum, "modern," New Deal, or statist
liberals (i.e.,
new liberals) see market failures as ubiquitous. Even if this is true, libertarians argue that the
government or
state may do worse job than markets do, because of
bureaucracy and the influence of
special interests. This is called "government failure." Off the liberal spectrum, the
Marxian school typically argues that the elements of the economic "
ruling class" that benefit from market failures are often the most influential ones in politics, so that market failure and government failure end up working together.
Modern
macroeconomics, especially that of the
Keynesian or new Keynesian varieties, is based on the existence of market failures which prevent the automatic attainment of
full employment of resources and the working of
Say's Law.
See also:\n*
microeconomics\n*
externality\n*
social cost
Category:Economics
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