When markets fail

Market failure refers to a situation in which there is an inefficient allocation of goods and services in the market. Inefficient allocation takes place when pure self-interest drives the maximizing behavior of economic agents.

Market failure is attributed to the existence of externalities, common property resources, public goods, and asymmetric information.

Market failure often leads to government intervention designed to drive the market towards efficiency.

Activity

Khan Academy: "Positive Externalities"

• Watch this video about positive externalities.

Principles of Microeconomics: "Chapter 6, Section 3: Market Failure"

• Read this section for a more detailed look at the topic of market failure. Attempt the "Try It” problem before checking your answer.

Khan Academy: "Rent Control and Deadweight Loss"

• Watch this video about rent control and deadweight loss.

Khan Academy: "Minimum Wage and Price Floors"

• Watch this video about minimum wage and price floors.

Khan Academy: "Taxation and Dead Weight Loss"

• Watch this video about taxation and dead weight loss.

Khan Academy: "Percentage Tax on Hamburgers"

• Watch this video about a percentage tax on hamburgers.

Khan Academy: "Taxes and Perfectly Inelastic Demand"

• Watch this video about taxes and perfectly inelastic demand.

Khan Academy: "Taxes and Perfectly Elastic Demand"

• Watch this video about taxes and perfectly elastic demand.

Khan Academy: "Negative Externalities"

• Watch this video about negative externalities.

Khan Academy: "Taxes for Factoring in Negative Externalities"

• Watch this video about taxes for factoring in negative externalities.

Khan Academy: "Tragedy of the Commons"

• Watch this video about the tragedy of the commons.