Karthikeyan

Market failure occurs when resources are not allocated efficiently by the market, leading to a waste of resources and reduced welfare for society.

Causes of Market Failure

1. Externalities

• Costs or benefits affect people who are not directly involved.

• Example: Factory pollution affects nearby residents.

2. Public Goods

• Goods that everyone can use and cannot easily be restricted.

• Example: Street lighting and national defense.

3. Merit Goods

• Goods that are beneficial but may be underconsumed.

• Example: Education and healthcare.

4. Demerit Goods

• Goods that are harmful but may be overconsumed.

• Example: Cigarettes and alcohol.

5. Monopoly Power

• A single firm controls the market and may charge high prices.

6. Imperfect Information

• Buyers or sellers do not have complete information.

• Example: A customer buying a faulty product without knowing it.

Government Solutions

• Taxes and subsidies

• Laws and regulations

• Providing public goods

• Competition policies