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 ?
These models are designed to test the hypothesis of the social isolation theory that neighborhood effects may be more severe for young people who come from disadvantaged families.
In the context of neighborhood effects, the primary assumption in this model is that a family's neighborhood selection process is independent of the characteristics of the individual children in the family.
Two other indicators of perceived group influence--perceptions of influence of the upper class and influence of business and corporations--demonstrated no neighborhood effects among African Americans.
Using current age, gender, plan enrollment, health status, and neighborhood effects, I modeled the future "switch" decision.
For social work research particularly interested in neighborhood effects, we are challenged to make some rational choice about geospatial boundaries of these closed systems such that interventions and social policies can be evaluated with confidence.
As noted in the introduction, these results are especially interesting because the literature on neighborhood effects suggests that a number of labor market outcomes are tied to the characteristics of one's place of residence.
Finally, we control for neighborhood residential stability because a neighborhood's homeownership rate is plausibly linked to residential stability (Rohe and Stewart 1996), and we want to determine whether it is neighborhood homeownership or neighborhood stability that is responsible for neighborhood effects on children's outcomes.
This study attempts to test the existence of neighborhood effects in the aggregate diffusion process.
The burgeoning empirical literature on neighborhood effects offers a test of the competing predictions about the relationship between the incidence and growth of social problems.
The use of experimental designs has enabled researchers to identify social interactions or neighborhood effects on individual behavior.
However, recent work on neighborhood effects using multilevel statistical methods has pointed to the possible contextual effects of residential areas on health even after controlling for individual characteristics.

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