The New Palgrave Dictionary of Economics

2018 Edition
| Editors: Macmillan Publishers Ltd

Market Failure

  • John O. Ledyard
Reference work entry


Market failure occurs when there are too few markets, non-competitive behaviour, or non-existence, leading to inefficient allocations. Many suggested solutions for market failure, such as tax-subsidy schemes, property rights assignments, and special pricing arrangements, are simply devices for the creation of more markets. This remedy can be beneficial but, if the addition of markets creates either non-convexities or thin participation, then adding markets will simply lead to market failure from monopolistic behaviour. Examples are natural monopolies and informational monopolies. To achieve a more efficient allocation of resources in the presence of such fundamental failures one must explore non-market alternatives.


Asymmetric information Contingent claims markets Free rider problem Fundamental theorem of welfare economics Increasing returns to scale Lindahl prices Market failure Mechanism design Monopoly Monopsony Natural monopoly Non-competitive behaviour Non-convexity Non-existence of equilibrium Pareto efficiency Property rights reassignments Rational expectations 

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© Macmillan Publishers Ltd. 2018

Authors and Affiliations

  • John O. Ledyard
    • 1
  1. 1.