Market failure
In economics, a market failure is a case in which a market fails to efficiently provide or allocate goods and services. More generally, market failure refers to situations where market forces do not serve the perceived "public interest." Economists use model-like theorems to explain such cases. The two main reasons that markets fail are sub-optimal market structures and the inability to internalize costs or benefits into prices and thus into microeconomic decision-making in markets.
Examples of the inability to internalize economic costs or benefits into prices include:
Strategies to reduce these imperfections require alternative, non-market, institutions, such as the centralized government or state, tradition, and/or community democracy. These are often studied in the field of collective action.
Examples of sub-optimal market structures include:
Some economists, particularly those of the Austrian School and other libertarians, dispute whether market failures exist or that the presumed theorems are usable to justify interventions in the market. On the other end of the liberal political spectrum, "modern," New Deal, or statist liberals (i.e., new liberals) see market failures as an ubiquitous problem which needs to be corrected. In response, libertarians argue that the government or state may do a worse job than markets, because of bureaucracy and the influence of special interests. This is called "government failure", and is seen by new liberals as a much smaller and easily avoidable problem than market failure, where it exists at all. Off the liberal spectrum, the Marxist school typically argues that the elements of the economic "ruling class" who benefit from market failures are often the most influential people in politics, so that market failure and government failure end up working together.
Modern macroeconomics, especially that of the Keynesian or new Keynesian varieties, takes into account the existence of market failures which prevent the automatic attainment of full employment of resources and the working of Say's Law.
See also:
