market failure

(redirected from Market imperfection)

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 ?
These factors include shortage of skilled labor, energy crisis, market imperfection and weaknesses in physical infrastructure.
Furthermore, in the midst of this market imperfection, an onerous social relationship develops which Sagrario Floro, in his in-depth study of agricultural credit relations, calls the 'interlinked market system.' In this setup, the middleman-like the devil-entices the farmer to engage in money-lending, fertilizer, agro-chemical, machinery and other businesses, in the process perpetuating his perennial indebtedness.
It relies on a totally different kind of financial market imperfection to generate crises, but the result is the same - hiking rates to prevent crises damages the economy.
If we take into consideration that each company determines its dividend policy as a function of the market imperfection it faces, this conclusion is not surprising.
In their model, a market imperfection arises in the OTC market that is not present in the centrally cleared market.
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.
Each of the seminal contributions in this literature (Banerjee and Newman 1994; Dasgupta and Ray 1986; Galor and Zeira 1993: Mookherjee and Ray 2002, 2003) rely on some combination of a market imperfection and nonconvexity to generate a poverty trap (see Azariadis and Stachurski 2005; Bowles et al.
Krasa and Yanelis (1994), Leibowitz et al (1994), Sarnat (1974), Scarf (1994), and Stapleton and Subrahmanyam (1977) analyze market imperfection in various paradigmic set-ups.
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.