CHP 9:Market Failure

Where the pros come to learn


Market failure occurs when market fails to produced the product demanded by the consumers in the right quantities with the lowest possible cost that means that the market is inefficient for production. Number of factors indicate that market id failing:-

  • Shortage of products
  • High Prices
  • Poor quality products,etc.

Costs & benefits

Market failure takes into account all the cost & benefits. The different types of cost & benefit can be listed as follows:


  • Private cost – The cost to the producers who are producing that particular product or the cost to the consumers who are actually consuming the product or service.
  • External Cost – The cost to the third party is called external cost, where the person is not directly involved in production as well as in consumption but still he has to pay for it.
  • Social Cost- Private cost & external cost together are known as social cost.



  • Private Benefits – Private benefit is the benefit received by the consumers when he is paying for it or it can be received by the producers of that particular product.
  • External Benefit- It is when person is not paying for service or product but still he is receiving benefit it is known as external benefit.
  • Social Benefit- Private benefit & external benefit together are known as social benefit.

Market failure is thus caused by :

  • Abuse of monopoly power
  • Lack of public goods
  • Under provision of merit goods
  • Overprovision of demerit goods
  • Environmental degradation
  • Inequality in distribution of wealth
  • Immobility of factors of production
  • Problems of information
  • Short termism