market failure

Also found in: Wikipedia.

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 ?
At best, they underemphasize government failure, and they often overlook it entirely, especially when considering the concept relative to the theory of market failure.
Mr Robinson said: "These two urban villages offer the community the opportunity to utilise innovative and visionary proposals to make real and lasting change in areas that have seen years of decline, market failure and low social capital,"
Because today's bachelor's degree no longer conveys sufficient information about the skills graduating seniors possess, there is a market failure that affects employers, students, and colleges.
Their topics include a global perspective on the long-term impact of increased energy efficiency, why it has taken so long to make cost-effective energy efficiency fit utility business models, what is driving electricity consumption in Sydney, enhancing efficiency in the generation and delivery of electricity, what comes after the low-hanging fruit, whether trading in energy efficiency is a market-based solution to market failure or yet another market failure.
For a small-sized population such as Namibia, we can only emulate such a model by addressing through the enforcement of competition policy and law, market failures associated with a substantial reduction of competition while at the same time addressing certain aspects of market failure which are consumer protection related such as unfair deals and lack of information disclosures on consumers.
Similarly, excess pollution is seen as a market failure resulting from the negative externality of people imposing uncompensated costs on others by emitting pollutants into the environment.
The market success exemplified by the displacement of incandescent lamps by fluorescent lamps in offices is totally irrelevant to the question of market failure in the residential market.
It correctly states that regulation should follow upon some recognized failure of the free market, though no reference appears to "government or regulatory failure" to which the market failure should always be compared.
LONDON, March 1, 2011 /PRNewswire/ -- There has been a market failure to educate the consumer in the rental market, warned the new Chief Executive of the Tenancy Deposit Scheme, Steve Harriott.
He said: "Where we see market failure, we may take steps to intervene.
The local authorities representing the region have come together, in partnership with theWest Wales Chamber of Commerce, to develop a programme that will help address the current market failure in relation to business finance for local businesses.
Drawing heavily upon the accumulated data, Government Failure Versus Market Failure strives to give today's economic policymakers and politicians recommendations for optimal success in future strategies to promote optimal well being both in terms of social and free-market interests.