An Overview of Market Failure
This post will help enrich your understanding of market failure and its solution, as part of your Preliminary Economics course. Market failure is the scenario wherein resources are allocated inefficiently in a free market. To combat market failure from occurring, governments usually intervene and provide public and merit goods in the market.
Merit goods are goods or services that the government believes are beneficial to society, but they may not be produced in adequate quantities because the market is too small, and there is little or no incentive for private production.
- An example of a merit good is the government provision of libraries for community use and enjoyment.
Public goods are goods that are non-excludable and non-rival. This means that ones use of a public good does not decrease the consumption of another’s use of that public good. Moreover, public goods are able to be accessed by everyone.
- An example of a public good is national defence.
When market failure occurs, negative externalities can often arise. An externality refers to an unintended consequence arising from a private transaction.
- For example, a negative externality of a consumer purchasing a packet of cigarettes from a firm may be the decreased quality of life for those who are subject to passive smoking.
The videos below go into more detail about market failure and the provision of merit and public goods to avoid the existence of negative externalities.