Understanding Market Failure: Causes and Public Policy Intervention

When a market fails to generate public goods or unintentionally create externalities or give chance for the upsurge of monopolies or alienates parties by asymmetrical information or produces unwanted revenue distributions, the market tends to fail and it is called Market Failure. According to Wolf (1988), markets have frequent inadequacies and flop frequently, therefore providing the principle justification for public policy intervention. There are various kinds of market failure as described by Wolf (1988). They are externalities, uprising revenues, market inadequacies and distributional impartiality. Due to Market failure, the public policy is implemented and most of the cases, government intervene to improve the outcome but not all the cases

In market, there is the presence of unpriced but non-zero transaction costs. Due to the presence of transaction costs, trades are not formed. Some trades only took place if the charge of the unpriced transactions tends to zero or is less than the net financial effect to be expanded. Failure to accept these types of trades is the main reason for a market failure. When the cost of operating price system tends to zero then only the Market failures vanish. Besides, specifications of property rights are never fully defined so some costs are always required to solve them. Therefore, we can say that, unpriced transaction costs are generally universal (Allen 1991). As the transaction costs are omnipresent and it is everywhere, we can find the externalities and market failure wherever the transaction takes place. The market failure concept can be used to circumstances that many analysts would recognize as unimportant and tend to avoid. For example; A highway driver who drives very slow and impose on others fails to realize the cost of time value of another drivers on the highway. This also creates an externality. Non-market failure exists in this kind of situation as the highway is owned by Government. Wherever ethical threat or adverse selection may be initiated, externalities are found there. A fire insurance company is always concerned about the policy holder neglecting the fire prevention measures. Similarly, the flood insurance company may persuade people to construct their house in flood plains areas. If there is inefficiency in the law affecting markets, externalities are present there. A law that boosts inefficient breach of contract generates an externality. A state impose certain fee for the title transfer fees. If the fee to transfer the ownership of a new car is large then most of the people will not prefer the trade. Thus, the car manufacturer will develop few cars as monopolism. Therefore, we can say