Market failure
situation in which the allocation of goods and services by a free market is not efficient and can be improved upon from the societal point of view, often leading to a net loss of economic value
In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient – that can be improved upon from the societal point of view. The first known use of the term by economists was in 1958, but the concept has been traced back to the Victorian philosopher Henry Sidgwick. Market failures are often associated with public goods, time-inconsistent preferences, information asymmetries, non-competitive markets, principal–agent problems, or externalities.
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Quotes
edit- Market power and externalities are examples of a general phenomenon called market failure—the inability of some unregulated markets to allocate resources efficiently. When markets fail, public policy can potentially remedy the problem and increase economic efficiency. Microeconomists devote much effort to studying when market failure is likely and what sorts of policies are best at correcting market failures. As you continue your study of economics, you will see that the tools of welfare economics developed here are readily adapted to that endeavor. Despite the possibility of market failure, the invisible hand of the marketplace is extraordinarily important.
- N. Gregory Mankiw, Principles of Economics (6th ed., 2012), Ch. 7. Consumers, Producers, and the Efficiency of Markets
- The problem with Neoclassicals is that the model they fell in love with does not map reality, so they put down their mistakes to supposed market failures rather than reviewing the premises of the model. Under the pretext of a supposed market failure, regulations are introduced. These regulations create distortions in the price system, prevent economic calculus, and therefore also prevent saving, investment and growth. This problem lies mainly in the fact that not even supposed libertarian economists understand what the market is because if they did understand, it would quickly be seen that it's impossible for there to be market failures. The market is not a mere graph describing a curve of supply and demand. The market is a mechanism for social cooperation, where you voluntarily exchange ownership rights. Therefore based on this definition, talking about a market failure is an oxymoron. There are no market failures. If transactions are voluntary, the only context in which there can be market failure is if there is coercion and the only one that is able to coerce generally is the state, which holds a monopoly on violence. Consequently, if someone considers that there is a market failure, I would suggest that they check to see if there is state intervention involved. And if they find that that's not the case, I would suggest that they check again, because obviously there's a mistake. Market failures do not exist.
- Javier Milei, Special Address to the World Economic Forum, 18 January 2024
- We need to recognise that the entire information sector—from music to newspapers to telecoms to internet to semiconductors and anything in-between—has become subject to a gigantic market failure in slow motion. A market failure exists when market prices cannot reach a self-sustaining equilibrium. The market failure of the entire information sector is one of the fundamental trends of our time, with far-reaching long-term effects, and it is happening right in front of our eyes.
- Eli Noam in: "Eli Noam: Market failure in the media sector" at news.ft.com, February 16 2004