Market failure refers to situations in which resources are misallocated, resulting in inefficient outcomes. It often arises when there’s a sharp mismatch between supply and demand, when prices do not reflect reality, or when individual interests diverge from the collective good.
In economic theory, to understand why markets fail, we must first know how they’re supposed to work. In a functioning market, prices reflect the balance between supply and demand. But when markets malfunction, fair prices often disappear, typically due to excessive speculation or insufficient regulation.
Still, an imperfect market doesn’t always mean inevitable failure. Most markets have flaws, but not all require intervention. The most significant concern from an economic perspective is the difficulty of regulating relationships between producers and consumers.
Let’s explore one of the most basic reasons for market failure: public goods — and more specifically, the overuse of these goods and the lack of accountability for their creation.
Public goods are available to everyone, as it’s difficult — or nearly impossible — to exclude people from using them, even if they don’t pay. Think of benches in the subway: everyone uses them, but their maintenance is paid solely by taxpayers.
Markets typically struggle to provide public goods because potential suppliers cannot easily exclude users or charge them for their consumption. As a result, these goods are usually provided by the state.
Since market mechanisms don’t apply here, there’s a strong temptation to free ride — to benefit from a good without contributing to its cost. And when too many people do that, production can either stop entirely (because nothing is truly free) or fall far short of what is socially optimal, even when the benefits outweigh the costs.
There’s a common misconception that anything provided by the government is automatically a public good. That’s not true. Services like education, healthcare, and electricity are not public goods in the strict sense because users can be excluded if they don’t pay, and one person’s use can limit access for others.
So, what is a true public good?
A powerful example is national defense. Not everyone pays taxes or donates to the military, but everyone benefits from its protection. That’s why supporting the Armed Forces of Ukraine is vital — because as long as we all contribute, failure is not an option.
#Economics #PublicGoods #MarketFailure #Policy #Ukraine #EconomicLiteracy #BehavioralEconomics
