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Causes of Market Failure

Economics (Year 11) - Market Failure

Carys Brown

Market Failure

When inefficiencies occur within a market, total market welfare is not maximised. This results in dead-weight loss and market failure. There are many situations where market failure occurs: 

  • Information gaps

  • Externalities

  • Public goods

  • Common resources

  • Market power

These types of market failure are discussed further in upcoming modules. 

Information Gaps

Information gaps may be an example of market failure as buyers or sellers may not have enough information to make rational decisions regarding their purchases. This can cause distorted prices and a misallocation of resources. The concept of 'information gaps' relates to moral hazard, meaning that consumers must bear the burden of their poor decisions made through their lack of information. In order to prevent this type of market failure, governments can regulate information and education to consumers and producers to ensure that better decisions are made in the future. In turn, governments should also ensure that only quality and correct information reaches buyers.

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