Define market failure?

Question

My economics exam is tomorrow and I was wondering if anybody could outline what "market failure" is and why it occurs.

Answer 1

Market failure is a term used to describe a situation in which markets do not efficiently allocate goods and services. To economists, the term would normally be applied to situations where the inefficiency is particularly dramatic, or when it is suggested that non-market institutions (such as public policing and firefighting) would be more efficient and wealth-producing than their private alternatives.

On the other hand, the term "market failure" is also often used to describe situations where market forces do not serve the perceived public interest. In this article, however, the focus is on market failure as defined by mainstream economics. Economists use model-like theorems to explain or understand such cases. The two main reasons that markets fail are:

the inadequate expression of costs or benefits in prices and thus into microeconomic decision-making in markets.
sub-optimal market structures.
The existence of a market failure in a certain economic activity is often used as an argument that the activity in question should not be directed by market forces. This generally leads to a debate on the question of what - if anything - should be used to replace markets. The most common response to a market failure in the present day is to use the government to produce certain goods and services. However, government intervention may cause nonmarket failure by the intevention itself causing externalitites.

Answer 2

Define Market Failure

Answer 3

In capitalism the idea is that supply and demand left to their own, will create the optimal and efficient allocation of resources at the right price level.

On average. However it is not always the case, the market sometime fails to do that. The first example is most models assume perfect competition. Monopolies and monopsies, cartels, and oligopolies all move away from working toward efficient and optimum situations.


There is the idea of free goods and public goods. Take clean air and clean water. If it is free, to use, then the market doesn't stop factories from polluting it in making their money. It is a factor not measured in the capatalist equation unless you arbitrailly put a price on clean air and force them to pay it. But we don't know the value to put on it, so the idea that optimal production can be reached is a utopian idea.

The other thing is situations where you talk $$ and efficiency that might not be the best measurements. Basic health care and basic shelter needs. These things are talking efficiency in the terms of the next life you can save. Economics doesn't have a way to put a value on a life, so what is the standard? Economics says let those who are willing to pay the price buy the product. Fine for useless things like widgets and diamonds, but not everyone can afford to buy health. And if you are sick, you can't set a dream of working toward being able to afford health. A slum lord can act like a monopoly. What is the optimal economic level of death by cancer?

Answer 4

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RE:
Define market failure?
My economics exam is tomorrow and I was wondering if anybody could outline what "market failure" is and why it occurs.