What Is Market Failure?


Quick Answer

Market failure refers to the inefficient apportionment of goods and services by free markets, according to Wikipedia. Market failure is also used to describe situations in which there are no incentives for independent actors in a free market to seek maximum benefit for the whole society, notes David Pannell for the University of Western Australia.

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Full Answer

Several causes contribute to market failure. The first is information asymmetry, notes Scott Cooney of The Inspired Economist. Information asymmetry refers to the unequal access of relevant information by players in a market, resulting in improper decision-making. Externalities are another cause of market failure, notes Pannell. Externalities refer to the society-wide side effects of the actions of an independent entity in a free market. Pollution, the side effect of some beneficial economic activities, is one example of an externality.

Another cause of market failure, according to Wikipedia, is non-excludability. This refers to the inability by entities in a free market to restrict access to certain goods and services. Public roads are one example of a non-excludable good. Gridlocks are a side effect of this attribute. Non-excludable goods are also referred to as public goods. Weak or non-existent property rights are another cause of market failure, notes the University of Melbourne. Weak property rights discourage investment.

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