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Market failure

market failure: air pollution as externalities

Pollution is a typical type of market failure, wherein common people who never benefit from productions that incurred the pollution were worse-off by suffering from it.
Courtesy of Rich Duff

Market failure is a term describing the fact that market fails to attain the optimal or efficient allocation of resources. However, this does not necessarily mean economic failure. Sometimes it is suggested that non-market institutions (such as the production of national security) prove to be more successful in bringing welfare to society than market solutions.

It's rather rare that a market doesn't fail. Economists and policy makers only pay attention to market failures that have fiercely negative impact on our economy.

Types of market failures include:

  • Imperfect competition or market power: monopoly / monopsony, oligopoly / oligopsony, monopolistic competition, price discrimination, ...
  • Externalities: public goods, pollution, ...
  • Imperfect information or information asymmetry
  • Transaction cost: cost of search, measure, decision-making, bargaining, communication, regulation, contract enforcements, ...

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