market failures
Market failures occur when the free market fails to allocate resources efficiently, leading to negative outcomes for society. This can happen due to reasons like externalities, where a third party is affected by a transaction (e.g., pollution); public goods, which are non-excludable and non-rivalrous (e.g., national defense); and information asymmetry, where one party has more information than another, leading to poor decision-making. In these situations, government intervention may be necessary to correct inefficiencies and ensure that resources are distributed more equitably and effectively.
Additional Insights
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Market failures occur when the free market does not allocate resources efficiently, leading to negative outcomes for society. Common types include externalities, where the actions of individuals or businesses affect others not directly involved (like pollution); public goods, which are non-excludable and non-rivalrous (like national defense); and information asymmetries, where one party has more or better information than the other (like in used car sales). These failures can result in overproduction or underproduction of goods and services, prompting a need for government intervention to improve overall welfare and efficiency.