# Under what conditions does market failure occur?

Edit: Is it possible to broadly categorize the ways in which market failures occur into relatively few categories? If so, what are they?

• The different ways that market failure can occur form a countably infinite set. – Alecos Papadopoulos Feb 26 '16 at 18:07
• @AlecosPapadopoulos: I would go so far as to say such a set is uncountably infinite :) – Herr K. Feb 26 '16 at 21:26
• this answered question might be useful to you: economics.stackexchange.com/questions/9987/… – BB King Feb 29 '16 at 20:02
• Market failure can easily be boiled down to a number of categories you can count on one hand. Its absurd this question was closed. – B T Jul 5 '16 at 8:34
• @BT I have edited the question in such a way so that it might seem less broad and have reopened it. I think it would be good to write the question so that we can discuss whether or not we can categorize market failures as you describe. I hope this keeps with the spirit of the original question. – jmbejara Aug 22 '16 at 20:20

Any situation where markets fail to clear leads to market failure. Some common reasons for this are:

• Externalities, or agents not being responsible for costs or benefits of their actions

• Information assymetry, or agents operating with different information

• Irrationality, or agents doing random things for no reason
• Principal agent problems, where someone entrusted with others funds uses them wastefully
• Productive inefficiency, or firms failing to produce goods effectively given the allocated capital (think using Gatorade to water plants)
• Allocative inefficiency, where firms are not provided the appropriate capital
• Economies of scale, or the problem of capitalist firms failing to grow large enough to establish a service
• Destructive competition- eg, private militaries blowing each other up
• Shortsighted management of natural resources
• Monopoly
• Moral hazard, adverse selection, and other problems in contract theory
• There are only 2 causes of market failure: externalities and the inability for a free market to move between Pareto Optima. NONE of the following are market failures: Information asymmetry, irrationality, principle-agent problems, productive or allocative inefficiency, economies of scale, short sightedness, or moral hazard. I wrote an article on what market failure is, and you just recited all the usual myths. governology.wordpress.com/2016/07/05/… – B T Jul 5 '16 at 8:37
• Aren't those the same thing – D J Sims Jul 5 '16 at 8:48
• Not at all. Externalities are when costs or benefits are imposed on someone else without their consent. The inability for a free market to move between Pareto Optima is a function rather of inaction - this is embodied in the second welfare theorem of economics. If your economy consists of 2 people, one with everything and one with nothing, utility could almost certainly be improved by a bit of wealth sharing. But the free market can't do that on its own. The likely outcome is that the person without resources would be employed by the other in some way. – B T Jul 5 '16 at 9:03
• Externalities can be inaction – D J Sims Jul 5 '16 at 16:43
• Sure.. but the point is that the market's inability to move to a state where one person is worse off means that it can't move to a more totally optimal state by making one person a little worse off but making a lot of people much better off. This isn't an externality, but is a market failure. – B T Jul 5 '16 at 23:35