Market Failure

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Definition: Market Failure

Market failure is the situation that happens when the market value is not in equilibrium. Market failure 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. In terms of economics “Market Failure” is a state where supplies of goods and services is not enough as per the public demand. This quantity mismatch in between suppliers and consumers prevents equilibrium in market. Society can lose-out in result of market failure.


Importance of Market Failure

Market failure is an important topic as we are the end user or the customer and directly connected to the market. In simple terms a market can be successfully established if both the manufacturer or service providers and the end users or customers are happy with the goods or services. Based upon the quality of goods or services the demand increases hence our economy also get changed positively because of the employment and exports. When a market fails it directly affects the end users or customers as well as the country’s economy. In the other aspect when market fails specially those manufacturers or industries, those are somewhat responsible for air pollution, water pollution, noise pollution can be reduced. In simple words it helps to restore the environment somewhat to its natural state.

Market failure is of two types i.e. complete and partial. It can be explained below.

1. Complete market failure: It occurs when the market simply does not provide products and services at all.

2. Partial market failure: It occurs when the market functions but it produces either the wrong quantity of a product or at the wrong price.

Market Failure

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.


Market failure can happen because of:

1. Negative externalities: If social cost of production exceeds the private cost.

2. Positive externalities: If social benefits of consumption exceeds the private benefit.

3. Impact of imperfect information: Good products are under-produced and not so good products are over-produced.

4. Market dominance by monopolies: Under-production and high price than would exist under conditions of competition.

5. Factor immobility: Loss of productivity and unemployment.

6. Equality issues: Unacceptable distribution of income and consequent social exclusion.


Disadvantages of Market Failure

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.


Example of Market Failure

In this example we will see two companies, “Super Polythene Industries (SPI)” which is a polythene manufacturing company and manufactures poly bags for day to day use, mostly in case of grocery container & “Hello World Telecom Limited (HWTL)” which is a land-line communications and internet service provider. Below is the explanation of these two companies.

SPI: Polythene or plastic plays an important role in today’s market. Its easily available and cheap, hence widely used by public. It became a major environmental pollution issue due to its nature (non-biodegradable) and quantity and the air pollution. Gov. as well as people took some strong actions to prevent the environment from the artificial disaster. Though it is still a basic need or demand of people for day to day use, but somehow they are managing with substitute products. This is a market failure for the company

HWTL: Communication and internet service providers are playing a vital role in our day to day life. In such kind of business, always public demands increase to get better service at low price. HWTL was one of the biggest service providers in this area and has a huge user’s count in starting of 21st century. The customers were happy with the land-line and internet services they were getting from the service provider until the introduction of digital communication or mobile communication. The digital communication spared out rapidly. User got cheap calls, cheap internet bills even sometimes free services as per the service provider special offers. This ended the land-line communication completely and started a new age of communication. Hence this is market failure for HWTL.

Hence, this concludes the definition of Market Failure along with its overview.

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