Economics PBL

Economics PBL
Name: Md. Abuzharr Tafhim

Class: Std-8
Roll: 06
Section: Jupiter
Topic: Market Failure
What is Market failure?
Market failure refers to a situation in which a free market fails to allocate

resources in an efficient and socially desirable manner. This can occur for a
number of reasons, including externalities, public goods, market power, and
incomplete or asymmetric information.
Externalities refer to the costs or benefits of a transaction that are not reflected
in the price. For example, pollution from a factory may impose costs on the
environment and society that are not factored into the price of the goods
produced. In this case, the market may fail to allocate resources efficiently
because the full cost of production is not being accounted for.
Public goods, such as national defense or clean air, are goods that are
non-excludable and non-rivalrous. This means that once they are provided,
everyone can benefit from them and their consumption by one individual does not
reduce the availability of the good to others. Because there is no market
mechanism to allocate these goods efficiently, the government may need to step
in and provide them.
Market power occurs when a single buyer or seller has the ability to influence
prices in a market. This can result in inefficient outcomes, such as higher prices
or reduced output, as the monopolist or oligopolist seeks to maximize their own
profits.
Incomplete or asymmetric information occurs when one party in a transaction

has more information than the other party. For example, a used car salesman may
have more information about the quality of a car than the buyer, which can result
in an inefficient allocation of resources.
In these cases, market failure may occur, leading to inefficient outcomes that do
not reflect the true costs and benefits of a transaction. As a result, government
intervention may be necessary to correct these failures and ensure that resources
are allocated efficiently and in a socially desirable manner. This can involve
policies such as taxes, subsidies, price controls, and regulations to internalize
externalities, provide public goods, promote competition, and improve
information disclosure.
Why does it occur?

Market failure occurs due to several factors that prevent the efficient allocation
of resources in a free market. These factors include externalities, public goods,
market power, and incomplete or asymmetric information.
Externalities occur when the costs or benefits of a transaction are not fully
reflected in the price, leading to inefficient outcomes. For example, pollution from
a factory may impose costs on society that are not factored into the price of the
goods produced, leading to an overproduction of the goods.
Public goods are goods that are non-excludable and non-rivalrous, making it
difficult for the market to allocate them efficiently. For example, national defense
or clean air are public goods that are difficult to price and allocate through the
market.
Market power occurs when a single buyer or seller has significant influence over
prices and output, leading to inefficiencies such as higher prices or reduced
output.
Incomplete or asymmetric information occurs when one party in a transaction

has more information than the other party, leading to inefficiencies such as
adverse selection or moral hazard.
All of these factors can lead to market failure, where the free market fails to
allocate resources in an efficient and socially desirable manner. As a result,
government intervention may be necessary to correct these failures and ensure
that resources are allocated efficiently and in a socially desirable manner.
What are the main causes for such occurrences?

The main reasons of market failure are:
1. Externalities: Externalities occur when the actions of one economic agent

have an impact on another economic agent that is not accounted for in the
market price. Externalities can be positive or negative and can lead to
underproduction or overproduction of goods and services.
2. Public Goods: Public goods are non-excludable and non-rivalrous, meaning
that they are difficult to price and allocate through the market. This can
lead to the underproduction of public goods such as education, health care,
and national defense.
3. Market Power: Market power occurs when a single buyer or seller has
significant influence over prices and output, leading to inefficiencies such
as higher prices or reduced output.
4. Asymmetric Information: Asymmetric information occurs when one party
in a transaction has more information than the other party, leading to
inefficiencies such as adverse selection or moral hazard.
5. Imperfect Competition: Imperfect competition occurs when there is not
enough competition in the market, leading to higher prices and reduced
output.
6. Inequality: Inequality can lead to market failure if certain groups are
unable to participate fully in the market, leading to underproduction or
overproduction of goods and services.
7. Uncertainty: Uncertainty can lead to market failure if businesses are
unable to accurately predict future market conditions, leading to
inefficient allocation of resources.
All of these factors can lead to market failure, where the free market fails to
allocate resources in an efficient and socially desirable manner. As a result,
government intervention may be necessary to correct these failures and
ensure that resources are allocated efficiently and in a socially desirable
manner.
What can be the aftermath of such situation?

The aftermath of a market failure can have various economic and social
consequences. Here are some possible examples:
1. Economic inefficiencies: Market failure leads to an inefficient allocation of

resources, which means that society may not be producing the right
amount of goods and services, resulting in a loss of potential economic
output.
2. Wasted resources: A market failure can lead to a waste of resources as
businesses and individuals invest in the wrong products, services or
projects.
3. Loss of income and employment: A market failure can result in job losses
and lower incomes for individuals and businesses.
4. Negative externalities: Market failures can lead to negative externalities
such as pollution, which can damage the environment and harm public
health.
5. Social unrest: Market failure can cause social unrest, particularly if
certain groups are disproportionately affected. This can lead to protests,
riots, or other forms of civil unrest.
6. Reduced economic growth: A market failure can lead to a decline in
economic growth, as resources are not being used efficiently, which can
lead to lower levels of innovation, investment and productivity.
7. Unequal distribution of resources: Market failures can exacerbate
inequality and create a situation where certain groups or individuals have
more access to resources and opportunities than others.
Overall, market failures can have wide-ranging consequences that can affect
various aspects of society. It is important to address market failures promptly
and effectively to minimize their negative effects and ensure that resources are
allocated efficiently and fairly.
Summary and conclusion
In summary, market failure refers to a situation where the allocation of resources

in a free market is inefficient, resulting in a loss of economic output and negative
consequences for society. This can occur due to various reasons such as
externalities, imperfect information, public goods, market power, and incomplete
markets. The aftermath of market failure can lead to economic inefficiencies,
wasted resources, negative externalities, social unrest, reduced economic growth,
and an unequal distribution of resources.
To prevent or mitigate market failure, governments can intervene through

regulations, subsidies, taxes, or other policies to correct market failures and
ensure that resources are allocated efficiently and equitably. In some cases,
market failure may require a more fundamental restructuring of the economic
system to address underlying issues such as inequality or environmental
degradation.
In conclusion, market failure is a significant issue that can have wide-ranging
consequences for society. It is important to recognize the causes and
consequences of market failure and take action to address it through appropriate
policy interventions to ensure that resources are allocated efficiently and
equitably. By doing so, we can promote greater economic and social welfare and
foster a more sustainable and inclusive economy.
To prevent market failure, various policy interventions can be adopted. These

may include regulations to correct externalities, such as environmental
regulations to curb pollution, subsidies to incentivize the production of public
goods, taxes to correct for market power, and welfare programs to address
inequality. In addition, ensuring complete information, facilitating competition,
and promoting open markets can also help prevent market failure. It is important
for policymakers to carefully assess the causes and consequences of market
failure and implement targeted policies that address underlying issues to ensure
efficient and equitable resource allocation.

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Name: Md. Abuzharr Tafhim

What is Market failure?

Market failure refers to a situation in which a free market fails to allocate

Incomplete or asymmetric information occurs when one party in a transaction

Why does it occur?

Incomplete or asymmetric information occurs when one party in a transaction

What are the main causes for such occurrences?

1. Externalities: Externalities occur when the actions of one economic agent

What can be the aftermath of such situation?

1. Economic inefficiencies: Market failure leads to an inefficient allocation of

Summary and conclusion

In summary, market failure refers to a situation where the allocation of resources

To prevent or mitigate market failure, governments can intervene through

To prevent market failure, various policy interventions can be adopted. These

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