Market failure can be defined as give full play to the market mechanism but still cannot achieve social welfare maximization. Market failure was caused by the free market fails to allocated resources in an optimum and efficient manner. Type of market failure can be divided into three types; there are externalities, public goods and non-competitive behavior. Externalities is part of the interests of people's economic behavior cannot be classified for their own enjoyment of, or part of the cost do not have to be borne. Such as manufacturers produced products will influence the third parties. Externalities can be divided into positive externalities and negative externalities. Typical negative externalities refer to the environmental pollution. For example, emissions of the waste water during the production and noise caused by the construction project, these activities will cause environmental pollution. On the other hands, preserve the historical heritage, allow the people know about the history of the past, this is positive externalities.
Public goods have characteristic of non-rivalry and collective consumption. Non-rivalry is the items can be common consumer and enjoy. Because of public goods have two characteristic of non-rivalry and collecting consumption, it cause every consumers can enjoy the benefit of public goods at no cost. We called the mentality of sit idle and enjoy the fruits of other's work as Free-rider Problems. Such as national defense, regardless of a person whether he was contribution or not contribution to national defense, but we still cannot stop him to enjoy the benefit which is brought by national defense. When we are able to enjoy an item without payable, the price mechanism will lose their function. Prefect competition does not always exist in real markets, and more often than not, free market forces do not lead to optimum efficiency in resource allocation. One of the examples is the monopoly. Monopoly means in a market,...
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