Market Failure

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  • The result of the failure of markets to achieve efficiency. Failure is normally the result of too much confidence in the free operation of the market (market fundamentalism), an exceptional reliance on the theory that the market is capable of correcting itself. This view was predominant during the 18th century and part of the 20th century, until the Great Depression of the 1930s challenged the presumption of the classical view of the free market.

    Markets may be inefficient for a variety of distortionary reasons—a conspiracy or collusion to restrain trade, corruption, deception, adverse income distribution, ill-defined property rights, and externalities (which are the result of overallocation and underallocation of resources). When a market cannot function on its own accord, policy intervention may be required to aid ...

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