Question

what are 6 types of market failures?

Answer 1

The market clears and is efficient when equilibrium occurs by the competitive forces of demand and supply. If the market does not clear at a common price and output, a market failure occurs. It can be of six types as follows.

(1) Externality

An externality arises out of the actions of consumers or producers, the consequences of which are borne by thirs parties. For example, a factory may emit pollution, but the surrounding locality is harmed as consequence, giving rise to negative externality. Similarly, in case of positive externality, actions by producers may lead to a social benefit which is enjoyed by the society without paying for it. In presence of externality, there is a market failure.

(2) De-merit goods

Goods like cigarette and alcohol are de-mirit (sin) goods, the production and consumption of which may not be controlled by the market.

(3) Monopoly

If there is a single seller in the market (Monopoly), the market may fail to control any exploitation of monopoly power exercised by the monopolist.

(4) Inefficiency

If the market fails to produce a good in the most cost-efficient way, there is productive inefficiency, and if the consumers cannot buy the good in the most efficient method of allocation, there is allocative inefficiency. Both these types of inefficiencies cause market failure.

(5) Public goods

Public goods are goods that are provided by he government for which the users do not explicitly need to pay. Public goods have no market, so causes market failure, and finally

(6) Property rights

If property rights are not assigned to use and production of goods, the good becomes a common resource, which causes market failure.