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.
Copyright © 2012, Campbell R. Harvey. All Rights Reserved.

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.
Farlex Financial Dictionary. © 2012 Farlex, Inc. All Rights Reserved

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.

Collins Dictionary of Economics, 4th ed. © C. Pass, B. Lowes, L. Davies 2005
References in periodicals archive ?
"The term, industrial policy, has been somewhat toxic because it suggests old-school state selection of winners in an economy, instead of suggesting a push to make sure that you address market failures," Vestager said, warning that the proposed change would have prevented the commission from establishing that Google was dominant in online search globally, given rivals like Baidu (BIDU) and Yandex (YNDX)."We could not have done the Google cases if we, per definition, had to assume global markets because these are not global markets." [Reference Link]:[]
This mechanism does not allocate resources efficiently in agriculture resulting in many market failures such as but not limited to the following cases:
However, Villegas said reviving the NFA's old Kadiwa scheme could be a 'viable' option to address current market failures, particularly the proliferation of middlemen and traders who tend to inflate the prices of goods.
Summary: Pursuant to Article 14 of the Regulation of the Financial Market Council (CMF) on market failures, PARTNER INVESTMENT, a wholly-owned subsidiary of POULINA GROUP HOLDING, declared that it acquired 305,450
Keohane surveys a number of other responses to other market failures, both formal failures addressed in economic theory and more informal failures recognizable to the general public.
In the financial context, the principal normative justification for lawmaking is to correct market failures. (20) Therefore, a change in financial markets should drive a change in law to the extent needed to correct market failures resulting from the market change.
It is well-established that lesser market failures, such as strong network effects, are a basis for scrutiny.
Morality, Competition, and the Firm: The Market Failures Approach to Business Ethics.
This is the work that governments have done since Alexander Hamilton invented industrial policy, not as a corrective to proliferating market failures, but as foundational and continuous policy to create and shape markets themselves.