Two main causes of market failure?

Answer 1

• Existence of public good.
• Existence of externality.
• Existence of natural monopoly.
• Prevalence of market power.
• Information asymmetry.
• Incomplete market.

Answer 2

Sean Enright, BA in Economics4 votes by Nick Huber, Domhnall O'Huigin, Arik Beremzon, and Erik Fair

Market equilibrium requires rational actors to realize substantially all of the costs and benefits of trade. Market failure is possible any time these conditions are not satisfied.

Some specific situations contributing to market failure:

• Regulations: Restrictions such as price floors or price ceilings prevent the price mechanism from efficiently allocating resources. Example: minimum wage laws
• Market power: Some industries may feature economies of scale or significant start-up costs, so is possible for an inefficient market outcome to be reached if one firm (or a few large firms) is able to exclude others to the detriment of potential market participants. Example: telecommunications
• Transaction costs: If the cost of engaging in any trade are high in the first place, a market cannot function.
• Imperfect information: One party has material information that the other does not, or both parties lack material information that would affect whether or not the trade occurs, or for what price it occurs. Examples: used cars, financial instruments
• Externalities: A trade (or the goods being traded) may impose substantial costs on individuals not participating in the trade. Alternately, individuals not participating in the trade would realize significant benefits from it but the parties directly involved in the trade would not. Example: national defense
• Irrational actors: One party is not of sound mind when making the trade, factors are weighted inappropriately, long-term costs are ignored in favor of short-term benefits, etc.

It is important to understand that it's often a subjective call as to whether or not market failure exists in a given market.





(I am not the owner of this information, Sean Enright deserves all credit.)

Answer 3

In economics, always the answers are based on assumption. If else everything remains constant then the main cause of market failure is that the firm failed to recognize its core competencies or might be failed to reach that optimum level of the quality that the consumers actually required.

Answer 4

There are many causes of market failure. These causes could be internal like the loss of motivation or theft by an employee.