Final answer:
Market failures are inefficiencies in the marketplace often caused by inadequate competition, lack of information, externalities, and the under-provision of public goods. These can lead to monopolistic practices, uninformed decision-making, unaccounted costs or benefits affecting third parties, and challenges in providing non-excludable and non-rivalrous goods.
Step-by-step explanation:
Market failures occur when there is an element missing from the marketplace that prevents it from allocating resources efficiently. There are several sources of market failures:
- Inadequate competition among producers can lead to monopolies or oligopolies that manipulate prices and supply to their advantage, detrimentally impacting consumer choice and price fairness.
- Lack of information available to consumers and sellers hinders the ability to make informed decisions, which can lead to suboptimal outcomes like buying low-quality products or overpaying for goods and services.
- The presence of externalities, both positive and negative, where the full cost or benefit of production is not reflected in the market price. Pollution is a classic example of a negative externality, where the environmental cost is not borne by the producer or consumer.
- Public goods are not typically produced in a market economy because they are non-excludable and non-rivalrous, leading to under-provision and overuse without government intervention.
These failures can lead to unwanted results like poverty, inequality, environmental degradation, and overall economic inefficiency. For example, immobile resources such as land, labor, and capital are unable to respond quickly to changing market demands, which can also contribute to market failure.