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B200 TMA02 - Essay Example

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Market failure is a concept, which holds that there is inefficient allocation of goods and services by a free market. Market failure can better be explained as a situation in which an individual or single entity's actions towards fulfillment of its own interests lead to unsatisfactory outcomes for the society on the whole.

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B200 TMA02

This can lead to inefficiency due to imperfect competition, which can take many different forms, such as monopolies, monopsonies, cartels, or monopolistic competition, if the agent does not implement perfect price discrimination. OPEC (oil cartel in Middle East is an example of this).
Second, the actions of an agent can have externalities, which are innate to the methods of production, or other conditions important to the market. An externality occurs when an economic activity causes external costs or external benefits to third party stakeholders who did not directly affect the economic transaction. In a competitive market, the existence of externalities would mean that either too much or too little of the good would be produced and consumed in terms of overall cost and benefit to society.
Finally, some markets can fail due to the nature of certain goods, or the nature of their exchange. For instance, goods can display the attributes of public goods or common-pool resources, while markets may have significant transaction costs, agency problems, or informational asymmetry. In general, all of these situations can produce inefficiency, and a resulting market failure.
"One cause of market failure is the limited nature of property rights. ...
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