Question

what drawback does the presence of market failure create in the microeconomy? How is this drawback typically created?

Answer 1

Market failure is a condition in which market solution (i.e., market forces unhindered or free play) will not lead to social equilibrium or optimal welfare. In the ordinary sense, market failure means that prices fail to provide the correct signals to buyers and producers of economic agents and that the economy does not work in the conventional manner. State interference is beneficial to improve market performance.

Price shifts, the incentive for profit-maximization and, above all, the self-interest of decision-making units, etc .— all deal with channeling capital away from unproductive to more competitive and productive production lines. This means market is working, market is productive, and business is healthy. But markets aren't operating well, sadly. With respect to allocation efficiency, the markets are struggling. Hence the term 'the failure of the sector.' This is an outcome which leads to economic inefficiency. Market failure means any business outcome considered less successful than the best attainable result.

Externalities, the public interest, corporate control, and knowledge incomplete.
Market prices do not exist in all such instances of market failure, or do not represent the true value of what they are pricing. These four phenomena will every the effectiveness of the results on the private sector. Markets do not always work well in promoting specific social goals. It ignores the equity objective of resource management, assuming it can achieve relatively efficient outcomes in a significant number of cases other than the four described above. In other words, the capitalist system is struggling to create a 'equitable' income distribution.

Free market again could lead to macroeconomic failures. A market can find itself trapped in a state of massive unemployment when decisions about output and consumption go out of line. The aggregate demand is short of the total supply. This contributes to the piling up of unsold products triggering more production cuts and, ultimately, more increase in unemployment. Thus, effective resource allocation, fair income distribution and general price-level stability may not be accomplished in a free market, even if the government intervenes. Government interference is, of course, justified in fixing such business failures.