7.3.6—Reasons for market failure

Market failure can arise from external costs or benefits, non-rival or non-excludable goods, asymmetric information, market power or a missing market.

The diagnosis determines what is unpriced or misallocated. A Pigouvian tax may address a measurable external cost; information disclosure addresses knowledge; competition policy addresses market power. The same symptom can have different causes.

A shortage of vaccinations may reflect an external benefit rather than a monopoly. A single dominant supplier may instead restrict output even when no spillover exists.

Do not label every high price “market failure”, and do not choose a subsidy before explaining which social marginal curve is missing from the market decision.