Market Successure: Causes And Types Of Market Failure

INTRODUTION Before discussing about market failure let’s get to know about market efficiency. When there is market efficiency market is in equilibrium and resources are allocated efficiently. This is the case where both marginal cost and marginal revenue is equal to each other. There are a few conditions to achieve market efficiency,

1. The market must be competitive. The competition between sellers and buyers creates equality between demand and supply price of the market.

2. There are no any external benefits or costs in the market.

3. There must be perfect and complete information about market prices and its behaviour.

However, in the real world this is not a possible situation because

1. Types of market failure

1.1 Externalities When the price mechanism (free market) fail to give highest social benefits and social cost in to account it can cause market failure as externalities. They are defining as third party effects or neighbourhood effects. Externalities create a difference between private and social costs as well as private and social benefits. Private costs are the costs of an economic activity to an individual. Social costs are the total costs of an economic activity both an individual and the third parties (external cost).

Social cost = Private cost + External cost Private benefits are the benefits of an economic activity to an individual. Social benefits are the total benefits of an economic activity to both an individual and the third party.

Social benefit = Private benefit + External benefit To have allocate resources efficiently marginal social benefit and marginal social must be equal (MC = MB). But market economic system not interest about external benefits or