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In economics, a market failure is a case in which a market fails to efficiently provide or allocate goods and services. More generally, market
failure refers to situations where market forces do not serve the perceived "public interest." Economists use model-like theorems
to explain such cases. The two main reasons that markets fail are sub-optimal market structures and the inability to internalize
costs or benefits into prices and thus into microeconomic decision-making in markets.
Some economists, particularly those of the Austrian School and
other libertarians, dispute whether market failures exist or that the
presumed theorems are usuable to justify market interventions. On the other end of the liberal political spectrum, "modern," New
Deal, or statist liberals see market failures as ubiquitous. Even if this is true,
libertarians argue that the government or state may do worse job than markets do. Off the liberal spectrum, the Marxian school typically argues that the elements of the economic "ruling class" that benefit from market failures are often the that the politically most powerful ones, so that
market failure and "government failure" end up working together.
Examples of the inability to internalize economic costs or benefits into prices include:
- externality
- public goods and common property resources
- undefined property rights
- asymmetrical information and adverse selection
- moral hazard and the principal-agent problem.
- the production of immoral goods, such as snuff films. (This last may be
seen as the case of prevailing moral standards being a public good that is
not produced by competitive markets.)
Strategies to reduce these imperfections require alternative, non-market, institutions, such as the centralized government or state, tradition, and/or community democracy. These are often studied in the field of collective action.
Examples of sub-optimal market structures include:
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