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Homework answers / question archive / What are the three market failures? what is the nature of the market failures and what can we done about solving it? Explain in detail

What are the three market failures? what is the nature of the market failures and what can we done about solving it? Explain in detail

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What are the three market failures? what is the nature of the market failures and what can we done about solving it? Explain in detail.

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There are different types of market failures. They include

  • Negative externalities. It refers to the detrimental effects of economic activities that affect the third parties. Indeed, negative externalities cause harm to society other than good. A perfect example is the pollution caused by industries. Consequently, it can be controlled by heavily taxing the pollutants. Consequently, the proceeds from the taxes should be used in funding projects focused on protecting the environment like the planting of trees.
  • Information failure of asymmetric information. It occurs when one party in a transaction fails to disclose all the useful information due to personal interests. The challenge of asymmetric information can be solved by ensuring that all parties in a transaction conduct comprehensive research aimed at disclosing all the information regarding the transaction.
  • Monopoly powers. It refers to a situation where a monopoly misuses the monopoly powers by exploiting consumers through higher pricing. The challenges should be minimized through the intervention of the government which should closely monitor the operations of monopolies. Implementation of price ceilings is a noble way of reducing incidences of overpricing by monopolies.