Market Failure

Essay by irbazkhanumtCollege, Undergraduate April 2012

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Market Failure � PAGE �1�


Market Failure

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Market Failure

The situation in which the following characteristics developed in the market is termed as Market failure. The different types of market failures are:

Market Power

The ability of a firm to set its price above marginal cost is called market power. The main aim of the government is to create a perfect competition in the market. But, many a times it is not possible. There always exist some firms who have an advantage over the other firms operating in the same industry. These firms gain sustainable competitive advantage by having larger market share, high technology, competitive market position and/or financial support. In many instances a single firm may be able to service the market or the government may wish to allow the firm to practice monopoly. When the economies of scale are larger, the government may allow the firm to practice monopoly but choose to regulate the price of the firm's products.


The effects on the third party who is not the part in decision making process is termed as the Externalities. There are two types of externalities; positive externalities and negative externalities. Positive externalities are the benefits that are received by the party which is not involved in the production or consumption of a good. For example, the benefits of the immunization of the public, which eventually leads to building a health society, benefits all the people irrespective of their participation in the process. The government programs aiming at imparting education to every one leads to the building a knowledgeable society. This initiative benefits the whole nation. (Medema, Steven G. 2004)

Public Goods

Public goods are the goods, which can be consumed by everyone. The goods...