Explain various circumstances under which market fails to allocate resource efficiently.

Circumstances under which free market fail to achieve efficient allocation of resources : Market failure occurs when resources are mis allocated, or allocated inefficiently.

  1. Where there are resources that can be used by everyone but belong to no one called common property resources.
  2. Where producers with excess capacity set positive prices.
  3. Where people not party to some market bargain are none the less significantly affected by it called externalities.
  4. Where there are goods whose consumption cannot be restricted to those who are willing to buy for them called public goods.
  5. Where substantial monopoly power causes prices to diverge from marginal costs.
  6. Where one party to a market has fuller knowledge of its consequences than is available to the other party a situation referred to as asymmetric information.
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