market failure
From The New Palgrave Dictionary of Economics, Second Edition, 2008
Edited by
Steven
N.
Durlauf
and
Lawrence
E.
Blume
Alternate versions available:
1987 Edition
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Abstract
Market failure occurs when there are too few markets, non-competitive behaviour, or non-existence, leading to inefficient allocations. Many suggested solutions for market failure, such as tax-subsidy schemes, property rights assignments, and special pricing arrangements, are simply devices for the creation of more markets. This remedy can be beneficial but, if the addition of markets creates either non-convexities or thin participation, then adding markets will simply lead to market failure from monopolistic behaviour. Examples are natural monopolies and informational monopolies. To achieve a more efficient allocation of resources in the presence of such fundamental failures one must explore non-market alternatives.
Keywords
asymmetric information; contingent claims markets; free rider problem; fundamental theorem of welfare economics; increasing returns to scale; Lindahl prices; market failure; mechanism design; monopoly; monopsony; natural monopoly; non-competitive behaviour; non-convexity; non-existence of equilibrium; Pareto efficiency; property rights reassignments; rational expectations
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How to cite this article
Ledyard, John O. "market failure." The New Palgrave Dictionary of Economics. Second Edition. Eds. Steven N. Durlauf and Lawrence E. Blume. Palgrave Macmillan, 2008. The New Palgrave Dictionary of Economics Online. Palgrave Macmillan. 22 May 2013 <http://www.dictionaryofeconomics.com/article?id=pde2008_M000056> doi:10.1057/9780230226203.1029

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