Market failure

The term “market failure” from economics describes a deficit in the free market, according to which, due to various factors, it cannot or can only inadequately fulfill its functions. For example, there is an imbalance between high demand and small supply, which can lead to deficiency symptoms.
This damages the economy as a whole, can lead to harmful side effects also in the social area and requires a possible intervention of the state.

Market failure with asymmetric information

One cause of market failure can be asymmetrical information distribution. It arises from inadequate communication between two contractual partners, i.e. providers and buyers.

When potential buyers examine a range of goods on offer, which are offered by different manufacturers at different prices, they often do not know about the quality of the goods or believe that the buyers are withholding important information from them.

For this reason, buyers usually buy the cheapest models because they fear that they will have made a loss-making deal with more expensive models with possible defects.

Consequence: The better, more expensive providers are forced out of the market, the offer is restricted and deteriorated.

Market failure in the face of restraints of competition

It is in the nature of the free market (and of people) that as a single individual or as a single company you want to work in the market without competition and make a profit. As much as competition stimulates the market and ultimately contributes to the prosperity of everyone, from an individual point of view entrepreneurs would like to limit this competition as far as possible.

It is no secret that there are such possibilities: Price determination by the monopoly, Price fixing Cartels, Suppression of foreign competitors through import duties and more.

For the market, such behavior results in fewer goods and services being offered at higher prices, which weakens the purchasing power of the population and reduces their prosperity.

Market failure in external effects

Wenn beim Handel zwischen zwei Marktteilnehmern Nebeneffekte oder -produkte entstehen, die Dritte belasten, jedoch von den aktiven Verursachern nicht mit einberechnet oder ignoriert werden, kann ein Marktversagen durch external effects auftreten.

A very clear example is environmental pollution, specifically, for example, a factory produces harmful waste that contaminates the area, which clearly puts residents at a disadvantage. The allocation of goods is no longer efficient or fair, as the residents of the affected areas are not being compensated.

Market failure in public goods

Public goods include everything that is freely available to the citizen because it is financed by the state. These include, for example, street lighting, traffic routes, the post office, police protection and access to education. This is not a matter of course in every country; for example, you often have to pay for university education in the USA.

The problem is that the provision of such goods is not regulated by market laws and is therefore prone to inefficiency. For example, street lighting only makes sense in inhabited streets. But who will want to deregister the lighting if nothing had to be paid for it beforehand?

There is therefore no efficient one Allocation of goods. In addition, private providers of goods of this type cannot really gain a foothold in the market if state competition offers the goods free of charge.

For example, private security services would have much better prospects if the state police were to permanently fail to protect their citizens across the board.

Market failure as a justification for government intervention

In a social market economy, the state takes on the role of a passive observer who only takes on the legal framework for the market and guarantees the freedom of all participants. But since the beginning of modern Market economy Periodic economic depressions as well as tangible crises occurred again and again, which made state intervention urgently necessary.

Economists like John M. Keynes (Keynesianism) took the view that in times of crisis the state must support the economy through targeted subsidies and other financial contributions, even if this would result in the state being temporarily overindebted.

In fact, governments to this day act to intervene in the event of market failures and inefficiencies. Another often accepted government intervention is redistribution between rich and poor.

Staatliche Eingriffe in die Wirtschaft sind jedoch auch stets Gegenstand fachlicher Kritik, da bei einer aktiven Allocation der Marktgüter durch den Staat die Pareto-Effizienz quasi abgestellt ist, d.h. ohne Selbstregulation des Marktes wird eine Verbesserung an einer Stelle nur zu einer Verschlechterung der Lage woanders führen.

There is also often fear of a cumbersome bureaucracy that could have worsened the market situation in the long term.

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