What is Market Failure?

Market failure happens when the free market doesn’t work well and resources are not used efficiently.

Main Causes:

1. Externalities – Side effects of actions:

   • Negative (e.g. pollution)

   • Positive (e.g. education)

2. Public Goods – Things everyone uses (e.g. street lights) that private firms don’t want to provide.

3. Lack of Information – Buyers/sellers don’t know enough (e.g. health risks).

4. Monopoly – One seller controls the market, charges high prices.

5. Too Few Merit Goods – Good for people but underused (e.g. schools).

6. Too Many Demerit Goods – Bad for people but overused (e.g. smoking).

How Government Fixes It:

• Taxes on bad goods

• Subsidies for good goods

• Laws and rules

• Giving information

• Providing public goods