What Is Market Failure? - Definition & Types

Instructor: Brianna Whiting
Making sure there are enough of the right products for everyone who wants to purchase them is a difficult task. This is because there are factors that cause the market to fail. In this lesson we will learn all about market failure and the different types.

A First Look at Market Failure

Have you ever gone to the store to buy something only to find they were all sold out? How frustrating! Ideally, a consumer demands a product and the market supplies it. This is the basics of supply and demand.

But when you demand a product and the store does not supply it, it causes a problem economists term 'market failure'. Market failure happens anytime there is a misallocation of resources. This is because there is not an equilibrium of demand and supply, which is when the amount demanded equals the amount supplied.

For example, a company may produce a product that they think will be wanted, but if they're wrong, the company did not make the right decision for society. This leads to a disruption in equilibrium because the quantity supplied does not equal the quantity demanded.

Types of Market Failure

There are two major types of market failure:

  • Complete market failure occurs when the market does not supply any products at all, which results in a missing market. For example, if consumers want purple boots and not one company makes purple boots, there would be a missing market because consumers demand purple boots, but no one supplies them.
  • Partial market failure happens when the market does not supply products in the correct quantity or at the price consumers want to pay. Again, if we think about our purple boots example, a partial market failure would occur if there were not enough purple boots to meet the demand of consumers, or the price of the purple boots were so high that consumers did not purchase them.

Causes of Market Failure

So what causes the market to fail? Well, there are a few reasons that cause both complete and partial market failure. Let's take a look.

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