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Causes Of Market Failure

Economics notes

Causes Of Market Failure

➡️ Externalities: These are costs or benefits that are not taken into account by the market and are experienced by a third party. Examples include pollution, noise, and congestion.

➡️ Imperfect Information: This occurs when one party in the market does not have access to all the relevant information, leading to an inefficient allocation of resources.

➡️ Monopoly Power: This occurs when one firm has control over the market, allowing them to set prices higher than what would be seen in a competitive market. This can lead to higher prices and reduced output.

What are the main causes of market failure?

Market failure occurs when the market fails to allocate resources efficiently. The main causes of market failure include externalities, public goods, imperfect competition, information asymmetry, and income inequality.

How do externalities contribute to market failure?

Externalities occur when the actions of one party have an impact on a third party who is not involved in the transaction. Positive externalities, such as education or vaccination, are underprovided by the market, while negative externalities, such as pollution or traffic congestion, are overprovided. This leads to a misallocation of resources and market failure.

What role does imperfect competition play in market failure?

Imperfect competition occurs when there are barriers to entry or a small number of firms dominate the market. This can lead to higher prices and lower output, resulting in a deadweight loss to society. In addition, firms with market power may engage in anti-competitive behavior, such as price fixing or collusion, further exacerbating market failure.

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