The Economist (reference below) defines market failure as occurring when a market left to itself does not allocate resources efficiently.
The Economist goes on to say:
“Interventionist politicians usually allege market failure to justify their interventions. Economists have identified four main sorts or causes of market failure.
- The abuse of market power which can occur whenever a single buyer or seller can exert significant influence over prices or output. [See Monopoly and Price Discrimination.]
- Externalities – when the market does not take into account the impact of an economic activity on outsiders. For example, the market may ignore the costs imposed on outsiders by a firm polluting the environment. [See Externalities.]
- Public goods such as national defence. How much defence would be provided if it were left to the market? [See Public Goods and Commons Problems.]
- Where there is incomplete or asymmetric information or uncertainty. [See Asymmetric Information, Signaling, and Game Theory.]
“Abuse of market power is best tackled through Antitrust policy. Externalities can be reduced through regulation, a tax or subsidy, or by using property rights to force the market to take into account the welfare of all who are affected by an economic activity. The supply of public goods can be ensured by compelling everybody to pay for them through the tax system.”
Atlas topic, subject, and course
The Economist, Market failure, Economics A-Z, at http://www.economist.com/economics-a-to-z/m#node-21529422, accessed 11 May 2016.
Page created by: Ian Clark, last modified 11 May 2016.