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Unit-23: Market Failure: Meaning and Sources

Monopoly Market Structure. How it happens, below are the reasons— Notes
The slope of demand curve for monopoly is
In the words of J. B. Taylor, “Any situation in which downward. So the average revenue is more than
the market does not lead to an efficient economic marginal revenue. The equilibrium condition for a
outcome and in which there is potential role of firm is MR = MC. When AR > MR (and MR = MC)
government. There are three broad sources of market then it means the price is more than marginal cost
failure: Public Goods, Externalities and Market
Power.” (AR > MC). In this condition, the production is low
rather than the production of perfect competition in
industry. So in the monopoly condition, however, the profit maximization is fulfilled but the satisfaction
does not occur, so the market does not capable to distribute the factors.
Apart from monopoly market structure, there are some other sources of market failure. All other sources
are described briefly as follows—
1. When firms work on minimum costs and exhibit the excess capacity. This type of market failure is
found in monopoly. In monopolistic competition, the firm does the production on the decreasing
segment of LAC, it means less of production than perfect competitive condition.
2. When property rights is not a right exclusively for an individual but an indivisual can use property
In this condition, an individual shows his rights on a factor and it shows the maximum uses of that
factor.
3. When we are not able to differentiate non payers
Market Failure Calls Government Help
from the profit by using a product. It is generally
To get good distribution of factors, market failure shown in terms of roads, bridges, law systems etc.
seeks help from government. The government helps These factors are used by everyone, however, they do
works on following terms— not pay anything for it.
1. To mind on every factors of market failure 4. When an economical process affects others
correction of economical situation. but nobody cares about this affect. This is called
2. To help the individuals from society to accept some Externality. It can happen either in production or
standard equities. consumption.
3. To affect the rate of economical development. 5. When imperfect information is available or
information is not true or it does not spread in
4. To give balance to economical situation from
income and price related problems. the market. It can be various changes or its data.
Economical agents have limited information.
5. To protect and establish the property rights of Asymmetric information or imbalanced information
individuals and couples of society.
is also a source of market failure.
6. When price of a product is diverged from its marginal cost by producer due to monopoly.
7. When market is not available.
Self Assessment

Fill in the blanks:
1. The one of the main sources for market failure is ................................ .
2. The slope of demand curve for monopoly is ................................ .
3. Market Failure calls ................................ .

23.1 Types of Goods and Services

To get detailed information in market failure, it is necessary to get knowledge about different types
of products. These types are: Public Goods, Common Property Resources and Normal Goods. The
differences between these goods depend upon four main resources and those are—

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