What is Market Failure?

In a market where there is equilibrium, the resources are allocated in the best possible manner and there is 'allocative efficiency'.

Allocative efficiency is when situation where Marginal cost is equal to Marginal revenue.

However, this is not possible in the real world. Market failure exists when the resources are not allocated efficiently. Community surplus is not maximised and thus there is market failure. From a community's point of view, producer surplus is not equal to consumer surplus.

market-failure-7

Market failure is thus caused by

  • Abuse of monopoly power
  • Lack of public goods
  • Under provision of merit goods
  • Overprovision of demerit goods
  • Environmental degradation
  • Inequality in distribution of wealth
  • Immobility of factors of production
  • Problems of information
  • Short termism

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