market failure

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Market failure

The inability of arm's length markets to deliverer goods or services. A multinational corporation's market internalization advantages may take advantage of market failure.

Market Failure

A situation in which the market does not allocate resources efficiently. Market failure can occur for one of three reasons. It may occur when one party has power that can prevent efficient transactions from occurring. An example is a monopoly. A second reason is the possibility that an efficient transaction can have externalities (side effects) that reduce efficiency elsewhere in the market or the broader economy. Finally, market failure can occur because of the nature of certain goods or services. Some analysts believe that market failure is usually the result of insufficient government protection of property rights. Market failure has been cited as a reason for government intervention in the economy. See also: Government failure.

market failure

a situation where a MARKET either cannot serve as a means to allocate resources or where the resulting resource allocations would not maximize society's economic welfare. In the case of COLLECTIVE PRODUCTS, like defence, which are enjoyed in common by all consumers, there is no market to allocate defence resources. In other cases, markets exist but do not operate efficiently For example, a product the production and/or consumption of which involves large SOCIAL COSTS of POLLUTION (see EXTERNALITIES) may be overproduced and consumed since markets for these products take into account only the private costs of production and consumption, while products like vaccines may be underproduced and consumed because their positive externalities are not reflected in their market prices. Markets that are dominated by monopolists (see MONOPOLY) may not allocate resources efficiently since BARRIERS TO ENTRY may prevent firms from entering markets and expanding market supply in response to increased market demand. Finally, FACTOR markets may lead to socially undesirable income distributions when low-income workers are paid very little compared with other workers.

Market failure often necessitates government intervention to correct for such failure. Governments generally make decisions about the provision of collective goods and finance their provision through TAXATION. For products that involve pollution externalities, governments may impose corrective product taxes to discourage supply and consumption, while products with positive externalities may be subsidized (see SUBSIDY). Where markets are dominated by monopolies, governments can use COMPETITION POLICY to regulate the prices charged by monopolists and/or supply terms. Finally, governments can intervene to correct socially undesirable income distribution by correctives such as MINIMUM WAGE RATES to help the low paid, AGRICULTURAL POLICIES to subsidize farmers and PROGRESSIVE TAXATION to require high-income earners to pay more taxes. See PRICE SYSTEM, RESOURCE ALLOCATION, ALLOCATIVE EFFICIENCY, WELFARE ECONOMICS, ROAD CONGESTION.

References in periodicals archive ?
For the reasons discussed in the preceding paragraph, it is likely that the variables "per capita agricultural credit" and "small loans as a percentage of total agricultural loans" measure the degree of capital market imperfection only very imperfectly.
Note first that, at least for consumer durables such as appliances, this model rests on an apparent market imperfection - the absence of complete resale markets for used units.
The natural market imperfection cited above (in the failure of a market to price a public good) is one of many such imperfections.
In contrast, the capital market imperfection hypothesis (Winter, 1989; also see Gron, 1992, and Cummins and Danzon, 1992) implies that premiums are not the best predictors of actual losses because past surplus affects premiums.
The sensible course to adopt when a market imperfection is identified, then, is to weigh the costs of the economic imperfection against the costs of trying to implement a policy to correct it.
Models of the owner operated firm typically assume a market imperfection for a good or input.
Now, strategic factor market theory does suggest that "home grown" purchasing and supply chain management capabilities--that is, capabilities built organically, within the boundaries of a firm--are more likely to be sources of strategic factor market imperfection than if such capabilities are acquired on competitive factor markets.
1993: Financial market imperfection and business cycles.
This study presents a dual strategic intent perspective, elucidating that international venturing by emerging economy private firms is prompted by exploiting firm-specific advantages, as well as circumventing market imperfection residuals embedded in home country economic transformation.
In a world of human fallibility and imperfect understanding of the complexity of the economy, INET holds out the promise of the pursuit of alternative strands of thought -- and thereby at least ameliorating this costly market imperfection.
The study identifies credit market imperfection in low-income developing countries as the likely reason for a strong negative relationship between income inequality and economic growth.
Thus in the presence of corruption and credit market imperfection, even if the poor do not renege on their repayment, they still may be excluded from the credit market.