Question

How can market failure be a positive for an economy? Explain.

Answer 1

In simple terms Market failure; it's mainly an economic situation in which the market fails to allocate the resources ( goods and services) equally to all. Mainly, failure of price mechanism accounts for this economic situation; Major reasons for market failure are:-

• Market structure:- the market structure is an important factor that leads to this failure of the market; the role of externalities, inefficacious producers, environmental issues, etc.
• Political instability:- shows the absence of good governance when the market issues can recorrected by government intervention. Governance failure results in the downfall of legislation, taxation, etc.
• Supply and demand:- imbalances between demand and supply show the inefficiency of allocation resources in the market.
• Externalities:- Role of the third party in the market manages the consumption, production of all goods and services; Externalities have positive and negative spillover effects in the market.
• Shortage of public goods:- Public goods have free of cost and beneficial for all in an equal manner; lack of public good arises the free-rider problem.
• Emerging monopolistic:- a market with a monopolistic nature restricts the output with an aim to earn more profit it causes market failure.

Positive impact on the economy

- Market failure helps an economy to learn for the attainment of social efficiency by

• Curbing negative externalities ( like a carbon tax, petrol tax)
• Promoting positive externalities like subsidies for solar panel set up for energy efficiency
• Regulation of demerit goods and buffer stocks.

- Market failure deals with the absence of administration and red-tapism. It would surely help an economy to conduct research and development through new endeavors.

- This situation rises the freedom to innovate new ventures in all spheres to overcome this crisis thereby an economy can pave a milestone for future growth.

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