Market Failure

To be in an equilibrium position, demand and supply for a particular good need to be equal or diagrammatically, the demand and supply curve must intersect at a point. But situation arises when demand and supply tends not to be equal, there crops up the partial market failure. Partial market failure results in an inefficient allocation of resources. The complete market failure evolves when the firm is not capable of supplying good at all. There are number of factors that cause market failure.

Usually a producer is found ignorant of what impact, his decision would have, so he might end up building market failure. Externalities present also lead to the market failure. Whether a positive externality or negative externality exists in the economy, both results in divergence of social marginal cost from private marginal cost and social marginal benefit from private marginal benefit and so market failure is bound to occur.

Usually minimum wages are set to ensure that employer does not exploit employees and employees are able to fulfill their needs. But if so happens that minimum wage is set above the price level, employer lays off some workers and reduces hiring anyone else. As a result, supply for the good reduces and so demand and supply are not equal anymore, market failure arises.

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