Market Failures

The market is not perfectly efficient.

No matter how much one may argue, the greatest social welfare cannot come from perfectly de-regulated industries. The role of the government has a greater need to create ‘fair markets’, rather than ‘free markets’. Similarly, this is why the U.S. Government has a Consumer Financial Protection Board, the Environmental Protection Agency, and various other entities. These government entities are trying to help level the proverbial playing field by creating rules that allow for markets that have an easier access to information, have time-consistent preferences for consumers, and minimize principal-agent impact.

A market failure occurs when the market does not allocate scarce resources to generate the greatest social welfare. A wedge exists between what a private person does given market prices and what society might want him or her to do to protect the environment. Such a wedge implies wastefulness or economic inefficiency; resources can be reallocated to make at least one person better off without making anyone else worse off.

Environmental Economics by Hanley, Shogren, and White (2007)

According to the definition used by Hanley, Shogren, and White, there are hundreds of thousands of economic inefficiencies that occur in the market place. Some examples of market failures can range from externalities to public goods like the ocean or atmosphere. However, this doesn’t mean that the US Government can subsidize and tax the consumer or firms to create perfectly efficient markets — the market is much more complicated than that.

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