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Unit - 5
Market Failure
Market Failure
It is an economic term that encompasses a situation where, in any given market, the quantity of
a product demanded by consumers does not equate to the quantity supplied by suppliers. This
is a direct result of a lack of certain economically ideal factors, which prevents equilibrium.
(D≠S; quantitatively and qualitatively)
It is the failure of the market economy to achieve an efficient allocation of resources.
Inefficient allocation of resources is where the unnecessary commodities are produced /
consumed in excess than the essential commodities. (inefficient allocation of resources;
where MSB≠MSC)
Production and consumption may be beneficial / harmful to the society/third party.
The pursuit of self-interest by the individuals leads to increase in social costs.
Types of goods
Excludable Non-Excludable
Private goods Common resources/goods
Rivalrous A seat in an aircraft, a seat in cinema Fishing area, Timber (logging
theatre, food, dress etc. company).
Club goods/Public enterprise Pure Public goods
Non-Rivalrous goods Air, Street light, Parks, Police,
Art galleries, Museum. Defence, etc.,
1. Rivalrous goods
A good which can be consumed by only one person at a time (no two people can consume the
same unit).
2. Excludable goods
A good or service is excludable, if people can be prevented from obtaining it, if they have
not paid for it.
3. Non-Rivalrous goods
Non-rivalrous goods may be consumed by many at the same time without preventing
simultaneous consumption by others (benefits are not depleted by an additional user).
4. Non-Excludable goods
A good or service is non-excludable if non-paying consumers cannot be excluded from
consuming it.
, 2
In case of non-excludable goods ‘free rider’ problem arises i.e., people benefit from goods or
services even without paying (the question is ‘how to limit free riding and its negative effects’).
o Eg: Wi-Fi facility at Coimbatore Race Course
o Eg: Municipal authority charges Rs. 20 to clean the surroundings. If an household does
not pay, they cannot be prevented from enjoying the benefits of clean surroundings.
Clean surroundings are a public good whose benefits are non-excludable. As a result,
the beneficiary is encouraged to ride for free.
→Common good
They are rivalrous in consumption but non-excludable (cannot prevent people from using).
Often the problem with common goods is overuse (depletes the resources).
o Eg: Fishing; fish caught by one boat reduces the catch available for others (overfishing is
the problem)
o Atlantic Cod fish (good source of protein, phosphorus, niacin, and Vitamin B-12) - Over
fishing leads to diminished population of Cod.
→ Public enterprise goods/club goods
They are excludable (could be accessed only after paying).
The good or service is not depleted.
→Private good
A private good is one that is both rivalrous and excludable (can be consumed only by one
person; by paying).
→Public good
A public good is a good / service which is non-rivalrous and non-excludable.
Public goods have to be provided at free of cost/no charge.
Private firms will not provide public goods (unable to charge for consumption)
Therefore, public goods have to be provided by the government. Eg: Street lights, light house
etc.
But all that is provided by the government need not be a public good (since government can
provide medical services etc for which they charge).
Other types of goods
(a) Merit goods
It is a commodity / service which the society values and judges that everyone should have
(whether the individual wants them or not).
It is based on need, rather than on ability and willingness to pay.
Consumption of merit goods is believed to generate positive externalities (MSB>MPB).
o Eg: Healthcare, education, public libraries.
Unit - 5
Market Failure
Market Failure
It is an economic term that encompasses a situation where, in any given market, the quantity of
a product demanded by consumers does not equate to the quantity supplied by suppliers. This
is a direct result of a lack of certain economically ideal factors, which prevents equilibrium.
(D≠S; quantitatively and qualitatively)
It is the failure of the market economy to achieve an efficient allocation of resources.
Inefficient allocation of resources is where the unnecessary commodities are produced /
consumed in excess than the essential commodities. (inefficient allocation of resources;
where MSB≠MSC)
Production and consumption may be beneficial / harmful to the society/third party.
The pursuit of self-interest by the individuals leads to increase in social costs.
Types of goods
Excludable Non-Excludable
Private goods Common resources/goods
Rivalrous A seat in an aircraft, a seat in cinema Fishing area, Timber (logging
theatre, food, dress etc. company).
Club goods/Public enterprise Pure Public goods
Non-Rivalrous goods Air, Street light, Parks, Police,
Art galleries, Museum. Defence, etc.,
1. Rivalrous goods
A good which can be consumed by only one person at a time (no two people can consume the
same unit).
2. Excludable goods
A good or service is excludable, if people can be prevented from obtaining it, if they have
not paid for it.
3. Non-Rivalrous goods
Non-rivalrous goods may be consumed by many at the same time without preventing
simultaneous consumption by others (benefits are not depleted by an additional user).
4. Non-Excludable goods
A good or service is non-excludable if non-paying consumers cannot be excluded from
consuming it.
, 2
In case of non-excludable goods ‘free rider’ problem arises i.e., people benefit from goods or
services even without paying (the question is ‘how to limit free riding and its negative effects’).
o Eg: Wi-Fi facility at Coimbatore Race Course
o Eg: Municipal authority charges Rs. 20 to clean the surroundings. If an household does
not pay, they cannot be prevented from enjoying the benefits of clean surroundings.
Clean surroundings are a public good whose benefits are non-excludable. As a result,
the beneficiary is encouraged to ride for free.
→Common good
They are rivalrous in consumption but non-excludable (cannot prevent people from using).
Often the problem with common goods is overuse (depletes the resources).
o Eg: Fishing; fish caught by one boat reduces the catch available for others (overfishing is
the problem)
o Atlantic Cod fish (good source of protein, phosphorus, niacin, and Vitamin B-12) - Over
fishing leads to diminished population of Cod.
→ Public enterprise goods/club goods
They are excludable (could be accessed only after paying).
The good or service is not depleted.
→Private good
A private good is one that is both rivalrous and excludable (can be consumed only by one
person; by paying).
→Public good
A public good is a good / service which is non-rivalrous and non-excludable.
Public goods have to be provided at free of cost/no charge.
Private firms will not provide public goods (unable to charge for consumption)
Therefore, public goods have to be provided by the government. Eg: Street lights, light house
etc.
But all that is provided by the government need not be a public good (since government can
provide medical services etc for which they charge).
Other types of goods
(a) Merit goods
It is a commodity / service which the society values and judges that everyone should have
(whether the individual wants them or not).
It is based on need, rather than on ability and willingness to pay.
Consumption of merit goods is believed to generate positive externalities (MSB>MPB).
o Eg: Healthcare, education, public libraries.
