In micro-economics market failure is characterized by resource misallocation and subsequent Pareto inefficiency. Just as the invisible hand falters, so is the case that the unregulated markets are incapable of solving all economic problems. In laissez-faire economy, market models mainly monopolistic, perfect competition and oligopoly are expected to efficiently allocate resources for the “welfare benefit” of the society. However individualistic and selfish private interests divert the public benefits thereby prompting government intervention to correct the imperfection which may lead to disastrous economic impact. Although corrective intervention policies by government may not necessarily address the underlying imperfection induced by private sector inefficiency, it still becomes a necessary remedy to benefit the wider public if private entities are not allocating efficiency. Furthermore, as the largest contributor of the Gross Domestic Product, poor and untimely corrective measures could signal the failure of both the private and public interests. Effectiveness of the policies and mechanisms designed by the state in market intervention are fundamental in correcting any perceived market failure. Intervention however does not guarantee effective remedies expected by the economy and could lead to deeper market failures if the regulations “crowd out” the private sector but is the viable approach to address market failure.
Market Failure Causes
In analysis of market failure, a distinction should be drawn between partial and complete market failures. While the later implies a functional market with ineffective function the former describes a complete non-functional market with inability to supply the market with required goods or services. There are a number of factors that can lead to market failure; these factors include but not limited to; competition failure (monopolist tendency), Inaccurate information, incomplete markets, externalities (both positive and negative) and unemployment. Competition failure or monopoly may result from natural monopoly where it costs incurred in production becomes lower when only one firm is involved in production than several firms producing the same output. In a monopolist market under-production, higher prices become dominant contributing to market inefficiency. Winston cites cases of misuse of monopoly power can lead to market failures and sometimes may lead to acute shortage of essential commodities (130).
Coordination failures by private markets are perceived to contribute significantly in inefficiency. Negative externalities like environmental pollution and positive externalities like focusing on public benefits and ignoring the private benefits significantly contribute to market failures. Fundamental questions have been raised to determine the appropriate time government intervention is required and the magnitude of inefficiency to warrant supposedly intervention or to let the market correct itself. ...