Market failure

Market failure

Market failure is the disequilibrium caused by inefficient and unequal distribution of goods and services in a free market that results in market distortion. Market failure happens when the demand for goods and services in an economy is higher than the quantity of goods and services produced. Market distortions in a free market include government regulations, monopoly power, and minimum wage requirements. Externality causes market failure and occurs when actions of an individual affect the well-being of another person yet the market prices do not reflect the benefits or costs. Positive externalities occur when a service paid by an individual benefit another while negative externalities occur when the actions of an individual harm other people. Another cause of market failure is the continued consumption of public goods by a percentage of the population who do not pay for public goods. For instance, those who do not pay taxes to the government continue to enjoy national defense as those who pay taxes. The third cause of market failure is market control by sellers and buyers who prevent the forces of demand and supply to set the prices of goods in a market. This is evident when sellers collude to create scarcity and set higher prices for goods and services.

The government can implement certain remedies that would correct market failure. The government should create and implement policies and legislation that changes the behavior of consumers to control unwanted behaviors that occur in negative externalities. For instance, the creation of a designated area for smoking has lower the effect of smoking on those who do not smoke. The government has a role in designing price mechanisms such as increasing taxes on certain harmful products, which in turn would discourage their consumption.