Ans: An economic term that encompasses a situation where, a common resource in any given market, the quantity of a product demanded by consumers does not equate to the quantity supplied by suppliers. This is a direct result of a lack of certain economically ideal factors, which prevents equilibrium (Market Failure 2013). Market failures have negative effects on the economy because an optimal allocation of resources is not attained. In other words, the social costs of producing the good or service (all of the opportunity costs of the input resources used in its creation) are not minimized, and this results in a waste of some resources. Market work well when prices reflect all values.
‘Market Failure’ occurs when some costs and/or benefits are not fully reflected in market price. For environmental assets, market can fail if prices do not communicate society’s desire and constrains accurately. Price often understate the full range of services provided by an asset, or do not exist to send a signal to the market place about the value of asset. Market failure occurs when private decisions based on these prices or lack of them; do not generate an efficient allocation of recourses. Efficiency is defined as Pareto optimality – the impossibility of reallocating resources to make one persons better off without making anyone else worse off (S-cool 2014). For example, the common argument against minimum wage laws. Minimum wage laws set wages above the going market-clearing wage in an attempt to raise market wages. Critics argue that this higher wage cost will cause employers to hire fewer minimum-wage employees than before the law was implemented. As a result, more minimum wage workers are left unemployed, creating a social cost and resulti...
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...l, or by penalizing polluters, the unwanted behavior may be controlled (14Ma)
In conclusion, in the majority of cases of market failure, a combination of remedies is most likely to succeed.
References:
http://www.economicsonline.co.uk/Market_failures/Types_of_market_failure.html (accessed March 16, 2014). http://coe.mse.ac.in/onerview/9.pdf (accessed March 15, 14). http://www.anzhealthpolicy.com/content/2/1/13/figure/F1?highres=y. Block, Walter. http://mises.org/journals/jls/7_1/7_1_1.pdf (accessed March 16, 2014).
Economics. 2012. http://www.econlib.org/library/Topics/College/marketfailures.html (accessed March 12, 2014).
Market Failure. May 10, 2013. http://www.investopedia.com/terms/m/marketfailure.asp (accessed March 15, 2014).
S-cool. 2014. http://coe.mse.ac.in/onerview/9.pdf (accessed March 15, 2014).
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