Market failure

Meaning and Concept Market failure is a term used to describe a situation in which markets do not efficiently allocate goods and services. To economists, the term would normally be applied to situations where the inefficiency is particularly dramatic, or when it is suggested that non-market institutions (such as public policing and firefighting) would be more efficient and wealth-producing than their private alternatives. On the other hand, the term "market failure" is also often used to describe situations where market forces do not serve the perceived public interest. In this article, however, the focus is on market failure as defined by mainstream economics. Economists use model-like theorems to explain or understand such cases. The two main reasons that markets fail are: • the inadequate expression of costs or benefits in prices and thus into microeconomic decision-making in markets. • sub-optimal market structures. The existence of a market failure in a certain economic activity is often used as an argument that the activity in question should not be directed by market forces. This generally leads to a debate on the question of what - if anything - should be used to replace markets. The most common response to a market failure in the present day is to use the government to produce certain goods and services. However, government intervention may cause nonmarket failure by the intevention itself causing externalitites.