Market Failure

Posted in Finance, Accounting and Economics Terms, Total Reads: 192
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Definition: Market Failure

Market failure is the situation that happens when the market value is not in equilibrium. It is a situation where you are unable to reap all the benefits out of trading or a situation. In cases of market failure, the supply of goods in the market is not in optimum, either surplus or lagging.


Reasons for market failure:

1. Regulations: A tightly bound market, devoid of any fluidity is bound to cause problems in the long run. Example, ceiling on prices, causes paying extra compensation difficult, leading to employee attrition

2. Power of the market in that sector

3. Costs involved in transactions: In many cases the cost of transactions & engaging in any trade is a tough proposition.

4. Externalities: A third party effect that plays an important role in the market. It could occur in the form of a trade mechanism that is affecting one who does not even participate. Example, in matters of national defense

5. Irrational Factors: Factors being weighed inappropriately. Example, people leaving a company for fulfilling short term perspectives rather than long term.


Disadvantages

1. The full potential is not realized in case of a market failure

2. The costs that were involved to set up the market structure is affected negatively.

3. Market failure has effects on the attrition, thereby there is a chance of high attrition in cases of market failure.

4. Labor shortage has serious implication with few workers being seriously burdened due to the effect of market failure.

Thus to make out why market failure takes place, it is imperative to understand the reasons why it occurs. We also need to understand the importance of intervention once the mechanism of market failure shifts in.

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