market failures
Inefficient resource allocation
Market failures are situations where free markets fail to allocate resources efficiently.
They occur when the price mechanism doesn't capture full costs or benefits: pollution imposes costs on third parties, public goods like streetlights get underprovided because non-payers can't be excluded, monopolies restrict output to raise prices.
The concept justifies government intervention in otherwise market-based economies.
One seller, no substitutes
- oligopolyFew firms dominate market
- cartelPrice-fixing coalition
- antitrustAgainst corporate market dominance
- price fixingIllegal coordinated rate-setting
barriers to entry · predatory pricing · natural monopoly · collusion · trust · price discrimination
Absence of balanced form
- adverse selectionPre-contract hidden knowledge problem
- moral hazardConsequence-free risk-taking incentive
- signalingConveying information nonverbally
- screeningEvaluative selection process
principal-agent · insurance fraud · warranty · disclosure · due diligence · risk assessment · insider trading · reputation
One benefiting without contributing
- collective actionOrganized group pursuit
- national defenseProtecting a country militarily
- public parksCommunal outdoor recreation areas
- street lightingMunicipal outdoor illumination
clean air · basic research · public health · vaccination · tragedy of the commons · public broadcasting · flood defense
Environmental harm from waste
- carbon emissionsReleased greenhouse gases
- greenhouse gasesEmissions that trap heat
- congestionExcessive accumulation causing blockage
- secondhand smokeAmbient cigarette exhalation others inhale
deforestation · overfishing · environmental degradation · noise pollution · water contamination · oil spills · acid rain · smog
Improper distribution of resources
- overproductionExcessive manufacture beyond need
- underproductionInsufficient manufacturing output
- distortionTwisting from original state
- disequilibriumLack of balance or stability
monopoly
One seller, no substitutes
- oligopolyFew firms dominate market
- cartelPrice-fixing coalition
- antitrustAgainst corporate market dominance
price fixing · barriers to entry · predatory pricing · natural monopoly · collusion · trust · price discrimination
asymmetry
Absence of balanced form
- adverse selectionPre-contract hidden knowledge problem
- moral hazardConsequence-free risk-taking incentive
- signalingConveying information nonverbally
screening · principal-agent · insurance fraud · warranty · disclosure · due diligence · risk assessment · insider trading · reputation · certification
free rider
One benefiting without contributing
- collective actionOrganized group pursuit
- national defenseProtecting a country militarily
- public parksCommunal outdoor recreation areas
street lighting · clean air · basic research · public health · vaccination · tragedy of the commons · public broadcasting · flood defense
pollution
Environmental harm from waste
- carbon emissionsReleased greenhouse gases
- greenhouse gasesEmissions that trap heat
- congestionExcessive accumulation causing blockage
secondhand smoke · deforestation · overfishing · environmental degradation · noise pollution · water contamination · oil spills · acid rain · smog · eutrophication
misallocation
Improper distribution of resources
- overproductionExcessive manufacture beyond need
- underproductionInsufficient manufacturing output
- distortionTwisting from original state
disequilibrium · price controls · rent-seeking · price ceiling · price floor
- class conflictclass struggle, class warfare, class consciousness, bourgeoisie, proletariat
- development economicseconomic growth, economic development, poverty reduction, human capital, structural change
- green economicsgreen economy, carbon tax, emissions trading, cap and trade, carbon credits
market failuresinvisible hand
Unintended societal benefit from self-interest
laissez-faire · spontaneous order · free market · deregulation
market, markets, marketed, marketing, marketer, marketers, marketplace, marketplaces, failure