Free markets are often seen as the ideal way to allocate resources efficiently. The idea is that supply and demand will lead to the best outcomes. This occurs when they are left to their own devices. However, this is not always the case. Market failure happens when free markets do not deliver efficient outcomes. This leads to a misallocation of resources. Such misallocation harms social welfare, the environment, or public health. In these cases, government intervention is necessary to correct these market inefficiencies.

In this blog post, we’ll explore the causes of market failure, including externalities, public goods, monopolies and asymmetric information. We’ll also look at how governments intervene to address these issues and improve outcomes for society as a whole.

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Theme 1: Intro to Markets & Market Failure in Economics

FAQs on Market Failure

What is market failure?

Market failure occurs when a free market fails to allocate resources efficiently, resulting in negative outcomes for society.

Why do governments intervene in markets?

Governments intervene to correct market failures, address negative externalities, provide public goods and ensure fair competition.

What are externalities?

Externalities are side effects of economic activities that affect third parties. They can be positive (e.g., education) or negative (e.g., pollution).

How does government regulation help in market failure?

Regulation ensures that firms act responsibly, addressing negative externalities (e.g., pollution control) and ensuring equitable access to essential services.

Can market failures be completely avoided?

While some level of market failure is inevitable, governments can minimise its negative impact through effective policies and interventions.