what is a market failure?

Expert Solution

Market failure is the economic condition characterized by an inefficient free market distribution of goods and services. The individual incentives for rational behavior in market failure do not result in rational results for the group. In other words, each person makes the right choice for him or herself, but those are proving to be the group's wrong decisions. It can often be seen in conventional microeconomics as a constant-state disequilibrium in which the quantity supplied is not equal to the quantity provided.

The four types of market failures are public goods, market control, externalities, and imperfect information.

Public goods create inefficiency, as it is not possible to exempt non-payers from sales, which then prohibits voluntary market transactions. Market control exists because restricted rivalry between buyers or sellers impedes a level playing field between demand price and supply price. Externalities hinder productivity because external costs or advantages do not completely reflect the value of products generated or the value of goods not generated by demand prices or supply prices. Imperfect information, including externalities, among buyers or sellers often means that demand prices or supply prices do not completely represent the value of the goods produced or the value of the goods not produced.

Rahul Sunny answered 7 months ago

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