Definition of 'Market Failure'
**Asymmetric information** occurs when one party to a transaction has more information than the other party. This can lead to market failure because the party with more information can take advantage of the other party. For example, in the market for used cars, the seller typically has more information about the condition of the car than the buyer. This can lead to the buyer paying too much for a car that is not worth the price.
**Externalities** are costs or benefits that are not reflected in the price of a good or service. For example, pollution is an externality because it imposes costs on people who are not directly involved in the production or consumption of the good or service that is causing the pollution. This can lead to market failure because the market does not take into account the external costs of production.
**Public goods** are goods that are non-rivalrous and non-excludable. This means that one person's consumption of the good does not reduce the amount of the good available for others to consume, and it is impossible to prevent people from consuming the good. For example, national defense is a public good because it benefits everyone in society, and it is impossible to prevent anyone from benefiting from it. This can lead to market failure because the market does not provide public goods.
There are a number of ways to address market failure. One way is to regulate the market. For example, the government can require car sellers to disclose the condition of their cars. Another way to address market failure is to use taxes or subsidies to correct the externality. For example, the government can tax pollution to reduce the amount of pollution that is produced. Finally, the government can provide public goods itself. For example, the government provides national defense.
Market failure is a serious problem because it can lead to inefficient allocation of resources. However, there are a number of ways to address market failure, and the government can play an important role in correcting market failures.
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