Market Failure: Definition, Types, Causes & Examples

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  • 0:00 Definition Of Market Failure
  • 0:39 Types Of Market Failure
  • 1:00 Causes Of Market Failure
  • 3:12 Lesson Summary
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Lesson Transcript
Instructor: Brianna Whiting
In this lesson, we will examine the term market failure. We'll look at the types and causes of market failure and then test your new knowledge with a quiz.

Definition of Market Failure

We've all had the experience of running to the store to pick up something we need, only to find out that the item is out of stock. We can wait until the item comes back into stock or grab a similar item that is currently in the store. As we reach for the replacement product, we ask ourselves: why doesn't the store supply enough products to meet the demand of the consumers? The answer to this question is market failure.

Market failure occurs when products that consumers demand do not equal the amount of supplies offered. Any time markets fail to allocate resources efficiently, the situation results in market failure.

Types of Market Failure

Now that we understand the definition, let's take a look at the two different types of market failure.

  • Complete market failure: This happens when a market does not supply any products at all.
  • Partial market failure: Unlike complete market failure, products are supplied. However, the market produces either the wrong quantity of product or charges the wrong price.

Causes of Market Failure

So how does a market failure occur? There are several reasons. Let's examine some of the more common reasons why markets fail.

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