Market Failure

 

At first, it may seem that the study of economics suggests that all goods and services are efficiently provided for by the invisible hand. In other words, the correct number of goods and services will be provided and all shortages and/or surpluses will be resolved by wealth maximizing individuals. Further, this will happen without government intervention.  However, a simple look at the world around us will show that the government is quite involved in our everyday market transactions. For example, in most states, the final purchase price of most goods and services include a sales tax. Some goods like tobacco and alcohol have a further tax that may be designed to alter people's behavior or "induce" them to do something more "socially" desirable. The existence of government intervention seems to suggest the invisible hand does not always work; that the invisible hand does not always create the efficient outcome. Economists refer to this situation as market failure.

 

In studying the sources of market failure (and how we may correct for the inefficiencies they create) economists typically look at three different categories. The categories are externalities, public goods, and imperfect information. When reviewing these pages, you will find that each of these topics are closely intertwined.