types pf market failure
Types of market failure
Monopoly power
Markets may fail to control the abuses of monopoly power.
Missing markets
Markets may fail to form, resulting in a failure to meet a need or want, such as the need for public goods, such as defense, street lighting, and highways.
Incomplete markets
Markets may fail to produce enough merit goods, such as education and healthcare.
De-merit goods
Markets may also fail to control the manufacture and sale of goods like cigarettes and alcohol, which have less merit than consumers perceive.
Negative externalities
Consumers and producers may fail to take into account the effects of their actions on third-parties, such as car drivers, who may fail to take into account the traffic congestion they create for others. Third-parties are individuals, organizations, or communities indirectly benefiting or suffering as a result of the actions of consumers and producers attempting to pursue their own self interest.
Property rights
Markets work most effectively when consumers and producers are granted the right to own property, but in many cases property rights cannot easily be allocated to certain resources. Failure to assign property rights may limit the ability of markets to form.
Information failure
Markets may not provide enough information because, during a market transaction, it may not be in the interests of one party to provide full information to the other party.
Unstable markets
Sometimes markets become highly unstable, and a stable equilibrium may not be established, such as with certain agricultural markets, foreign exchange, and credit markets. Such volatility may require intervention.
Inequality
Markets may also fail to limit the size of the gap between income earners, the so-called income gap. Market transactions reward consumers and producers with incomes and profits, but these rewards may be concentrated in the hands of a few.
Remedies
In order to reduce or eliminate market failures, governments can
Monopoly power
Markets may fail to control the abuses of monopoly power.
Missing markets
Markets may fail to form, resulting in a failure to meet a need or want, such as the need for public goods, such as defense, street lighting, and highways.
Incomplete markets
Markets may fail to produce enough merit goods, such as education and healthcare.
De-merit goods
Markets may also fail to control the manufacture and sale of goods like cigarettes and alcohol, which have less merit than consumers perceive.
Negative externalities
Consumers and producers may fail to take into account the effects of their actions on third-parties, such as car drivers, who may fail to take into account the traffic congestion they create for others. Third-parties are individuals, organizations, or communities indirectly benefiting or suffering as a result of the actions of consumers and producers attempting to pursue their own self interest.
Property rights
Markets work most effectively when consumers and producers are granted the right to own property, but in many cases property rights cannot easily be allocated to certain resources. Failure to assign property rights may limit the ability of markets to form.
Information failure
Markets may not provide enough information because, during a market transaction, it may not be in the interests of one party to provide full information to the other party.
Unstable markets
Sometimes markets become highly unstable, and a stable equilibrium may not be established, such as with certain agricultural markets, foreign exchange, and credit markets. Such volatility may require intervention.
Inequality
Markets may also fail to limit the size of the gap between income earners, the so-called income gap. Market transactions reward consumers and producers with incomes and profits, but these rewards may be concentrated in the hands of a few.
Remedies
In order to reduce or eliminate market failures, governments can