Market failure is the situation in which the market is working inefficiently. When there is no proper allocation of resources in the economy then this can cause market failure. When there is no desirable production in the economy I.e. if there is overproduction, underproduction, no production, shortage, surplus, etc. then this causes market failure. Market failure also induces due to the high price, very low price, low quantity of products, the existence of the imperfect market, the existence of public goods, public bads, externalities, asymmetric information, etc. mainly market failure occurs when there Is no proper allocation of the resource among all economical agents. When there is demand-side the defect that customers are not getting the right quantity of product and service in right time with desired quality then it can lead to the market failure. Similarly, if firm is not able to supply desired quantity of goods and services then it also causes market failure. If there is no perfect competition in the market and there is the existence of money poly then it can also cause market failure. However, it does not mean that the competitive market is free from the market failure. In competitive market failure occurs due to demand side and supply side market failure. However, in monopoly system, firm make decision in pursuit of pure self-interest and self-welfare due to which market does not work properly. Sometime asymmetric information between two agents like buyer and seller also cause the market failure. Asymmetric information is that information which is not equally known by all agent. Those agents who know more information regarding market and products or service can cheat to those who are far from actual information for example old car seller can cheat to buyer. It is because seller know defects in car but buyer may not know all defects. Not only asymmetric information but also adverse selection of goods and services can cause the market failure. One more important thing of market failure is public goods. Public goods are those goods which can not be exclude from use and also it has no rivals, for example street light and public defense. We cannot exclude street light and use of it by one person does not reduce to another person. Hence there is no single factor that can cause the market failure.
In competitive market, market failures are due to two factors which are discussed below. These two factors are general categories of market failure.
Demand-side market failure:
This market failure is due to demander in market. When demanders in market are not ready to pay for goods and services, then such market failure occurs. However, there are some goods and services in which we cannot charge prices for them. For example, during fireworks display we cannot charge anyone also no one want pay it because firework displays are shown in outside and public. Without paying, people can enjoy fireworks. Hence, people don’t pay for it. It means no private company are willing to conduct such firework display because they cannot generate required revenue so that they can manage their cost. Hence such market failures occur due to demand side failure.
Supply side market Failure
Such market failure 0ccurs due to supplier sides. This arises when firm don’t have to pay full cost for its production. For example, in cement production factory, when cements are produced and revenue is generated then factory get profit directly selling it. However, during cement production, there is also environmental pollution due to smoke that release in atmosphere. If firm has to pay economic cost for pollution then the firm cannot get profit and manage their cost. Hence firm stop to supply when firm has to pay full cost for pollution or smoke that is produced during coal burning. Such market failure is called the supply side market failure.
- Author G.B. Budhathoki