Market failures are institutional arrangements which deviate from the neoclassical model of perfect competition. Any market outcome which is undesirable can be referred to as a market failure, although most economists are often disdainful of any use of the term which does not correspond to some deviation from the model of perfect competition. Wikipedia lists seven categories of market failures: Monopolies, Public goods, Natural monopoly, Externalities, Bounded rationality, Information asymmetry and Property right as right of control. Each of these categories falls into one of my categories below.
Market Power
Monopolies (natural or not) and cartels are cases of market power, which allows firms to price above marginal cost. If firms can collude to reduce the quantity produced, they can drive up the price and their producer surplus (see graph below). In a competitive environment, some firms would defect and produce more, driving the price back down, or…
View original post 830 more words
Recent Comments