Market Failures from an Economic Perspective
Part of the Economics For Dummies Cheat Sheet (UK Edition)
Several prerequisites must be fulfilled before perfect competition and free markets can work properly and generate the socially optimal output level. Several common problems include the following:
Externalities caused by incomplete or nonexistent property rights: Without full and complete property rights, markets are unable to take all the costs of production into account.
Asymmetric information: If a buyer or seller has private information that gives her an edge when negotiating a deal, the opposite party may be too suspicious for them to reach a mutually agreeable price. The market may collapse, with no trades being made.
Public goods: Some goods have to be provided by the government or philanthropists. Private firms can’t make money producing them because there’s no way to exclude non-payers from receiving the good.