Explain various circumstances under which market fails to allocate resource efficiently.
Circumstances under which free market fail to achieve efficient allocation of resources : Market failure occurs when resources are mis allocated, or allocated inefficiently.
- Where there are resources that can be used by everyone but belong to no one called common property resources.
- Where producers with excess capacity set positive prices.
- Where people not party to some market bargain are none the less significantly affected by it called externalities.
- Where there are goods whose consumption cannot be restricted to those who are willing to buy for them called public goods.
- Where substantial monopoly power causes prices to diverge from marginal costs.
- Where one party to a market has fuller knowledge of its consequences than is available to the other party a situation referred to as asymmetric information.