market failure

John O. Ledyard
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.
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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. 23 October 2014 <http://www.dictionaryofeconomics.com/article?id=pde2008_M000056> doi:10.1057/9780230226203.1029

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