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 longer this externality exists; there will be less intermediation, which will lead to market failure and eventually instability of the financial as well as economic system as a whole.
There is such a thing as market failure, a situation where unregulated market transactions result in waste.
The program is a mix of financing, knowledge, and policy solutions to deal with this aviation market failure in the region.
In sections on principles and paying for services, he covers the cost of welfare; market failure and government failure; what to tax, who to tax, and how much to tax; rationing--who gets what; cash benefits as pensions and during working age; health services; paying for care; paying for schools and for post-compulsory education; and housing.
It recognizes that greenhouse gas emissions constitute a market failure that results, in part, from nonexistent property rights for the atmosphere.
Her work surveys examples of situations where the invisible hand fails, so that economists, governments, and private firms need to deploy "a creative and 'visible' hand--that corrects the market failure and provides for the public good" (2).
In Case 2 (which represents CBI), one would first examine if the aforesaid market change creates a market failure. Assuming it would, (44) one would then assess the consequences of that market failure.
Though many of the courts could have benefited from further attention to the price-disconnect market failure, at least (with the exception of Walgreens and Doryx) they anticipated a nontrivial role for antitrust law.
Heath's prescription is simple: in such cases, managers must not engineer or exploit the market failure. The "set of permissible profit-maximizing strategies is limited to those strategies that would be permissible under conditions of perfect competition" (p.
Stern agrees with the environmental economic convention that climate change is fundamentally a problem of "market failure." But where most economists would contend that climate policy is intended to fix one market failure--greenhouse gases--Stern identifies six: greenhouse gases; underinvestment in research, development, and deployment (RD&D) of energy technologies; imperfections in capital and risk markets; lack of coordination among networks; imperfect information; and under-recognized co-benefits.