Reasons of Market Failure


  1. Externalities – are costs that aren’t directly incurred by the buyer or seller. For example, smoking probably indirectly causes healthcare costs and decreased labor, but these costs are not paid by the seller or buyer at least at the time of purchase.
  2. Misreadings of market signals – This malinvestment can come from interest rate manipulation, uncertain  inflation/deflation expectations, legislation that unexpectedly interferes in the market, complicated market structures that may confuse investors/consumers, markets being overly optimistic/pessimistic.
  3. Human Elements. Add subjective emotional imperfect human beings to anything and only an idiot would not expect the unexpected. I suppose that’s stating the obvious but none the less, as they say, shit happens.
  4. Underproduction of merit goods: a merit good is a private good that society believes is under consumed, often with positive externalities. For example, education, healthcare, and sports centers are considered merit goods.
  5. Overprovision of demerit goods: a demerit good is a private good that society believes is over consumed, often with negative externalities. For example, cigarettes, alcohol, and prostitution are considered demerit goods.
  6. Abuse of monopoly power: imperfect markets restrict output in an attempt to maximize profit.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s