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Economics explained


Market failure

Market failure

Market failure

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It is argued that the free market may fail to achieve allocative efficiency and productive efficiency because of market failure.

Market failure exists whenever a free market, left to its own devices and totally free from any form of government intervention, fails to make the optimum use of scarce resources.

There are various reasons why market failure occurs:

there are externalities present in the market
information failure (for merit goods and demerit goods)
the provision of public goods
abuse of monopoly power in the market

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