Market failure describe the failure of market economy to

achieve an efficient allocation of resources in the

circumstances such; common property resources when
resources that can be used by everyone but it belong to
no one, in public goods; where goods are consumption
cannot be restricted to those who are willing to pay from
them, externalities, in asymmetric information situation; if
one party to a market transaction has fuller knowledge of
its consequences than is available to other party, if
needed market are not exist, if substantial monopoly
power exist. Monopoly is the antithesis of perfect
competition. It is the least competitive market structure,
with only one firm in the industry, the lack of competition
in monopoly means that the price is higher and quantity
supplied/demanded is lower than under perfectly
competitive circumstances. Market copes best with
:rivalries excludable goods as it shown in sketch

Excludable Non-Excludable
Common
Normal goods property

Riv Riv
alri apples, fishers , air , alri
es computer , wildlife es
dresses ,common land

Public goods
No No
n- n-
art galleries , defense, police,
Riv Riv
museums , public
alri alri
roads, bridges information
es es

Excludable Non-Excludable

Some economists assume that the markets can work

efficiently; if the perfect competition is being practiced
and based on balancing mechanism between demand and
supply. Here both buyers and sellers take the market price
as given (price taker), and where both have almost zero
 impact on the market price due to the fact that the
outcomes of number of firms in all industries are almost
the same. Therefore the firms are unable to influence the
general level of commodity’s price in the market, which
means that firms will have to alter the quantity of the
product produced and which aims to create some kind of
balance between demanded goods and services
depending of course of the changing price, which by the
way is changeable, of these goods and services as well as
on the degree of demanding on them by consumers. So
as a result and in perfect competition; firms are unable to
sell any output at a price greater than the market price.
Hence firms in the free market will only earn the bare
minimum profit necessary to keep them in the business.
Competition will arise and forces the market into
equilibrium where quantity supplied just equals quantity
demanded (competitive equilibrium). So basically, if
demand is less than supply, then the price has to fall for
demand and supply to be in equilibrium. In other words an
action to be taken is to reduce the price of the good in an
aim to increase the quantity demanded and vice versa.
The diagram below shows the case where the demand and
supply curves cross and where demand (D) =supply (S) to
achieve the equilibrium price (EP) according to the
.neoclassical theory

The intersection of supply and demand curves

.(determines equilibrium price (P0) and quantity (Q0
When consumers increase the quantity demanded at a
given price, it is referred to as an increase in demand.
Increased demand can be represented on the graph as the
curve being shifted outward. At each price point, a greater
quantity is demanded, as from the initial curve D1 to the
new curve D2. More people wanting coffee is an example.
In the diagram, this raises the equilibrium price from P1 to
the higher P2. This raises the equilibrium quantity from Q1
to the higher Q2. A movement along the curve is
described as a "change in the quantity demanded" to
distinguish it from a "change in demand," that is, a shift of
the curve. In the example above, there has been an
increase in demand which has caused an increase in
(equilibrium) quantity. The increase in demand could also
come from changing tastes, incomes, product information,
.fashions, and so forth
If the demand decreases, then the opposite happens: an
inward shift of the curve. If the demand starts at D2, and
decreases to D1, the price will decrease, and the quantity
will decrease. This is an effect of demand changing. The
quantity supplied at each price is the same as before the
demand shift (at both Q1 and Q2). The equilibrium
quantity, price and demand are different. At each point, a
greater amount is demanded (when there is a shift from
. D1 to D2

An out-ward or right-ward shift in demand

Increases both equilibrium price and quantity
When the suppliers' costs change for a given output, the
supply curve shifts in the same direction. For example,
assume that someone invents a better way of growing
wheat so that the cost of wheat that can be grown for a
given quantity will decrease. Otherwise stated, producers
will be willing to supply more wheat at every price and this
shifts the supply curve S1 outward, to S2—an increase in
supply. This increase in supply causes the equilibrium
price to decrease from P1 to P2. The equilibrium quantity
increases from Q1 to Q2 as the quantity demanded
increases at the new lower prices. In a supply curve shift,
.the price and the quantity move in opposite directions
If the quantity supplied decreases at a given price, the
opposite happens. If the supply curve starts at S2, and
shifts inward to S1, the equilibrium price will increase, and
the quantity will decrease. This is an effect of supply
changing. The quantity demanded at each price is the
same as before the supply shift (at both Q1 and Q2). The
.equilibrium quantity, price and supply changed
When there is a change in supply or demand, there are
four possible movements. The demand curve can move
inward or outward. The supply curve can also move
inward or outward

An out-ward or right-ward shift in supply reduces

equilibrium price but increases quantity

However understanding the way markets function will not

prevent markets to fail, which will occurred when the
allocation of goods and services by market is not efficient,
and where there is a waste of resources, or what known as
“welfare loss”, and where market can’t achieve total social
welfare. Therefore we can see the government role or
intervention in some forms of market failure and which is
mainly for the public interest . This failure can be due to
many factors; like for example the overused or
overexploited in the free market for the common property
resource. Because these goods are rivalrous but non-
excludable; there will not be social optimal exploitation of
a common property resource, where the marginal cost of
the last user is equals the value of the marginal addition
to total output. In this situation market will fail due to the
economically inefficiently and where the market price has
.failed to signal the true scarcity of the asset

Externalities also play important role in the market and it

can cause it to fail. An externality of course is a cost or
benefit imposed on people other than those who purchase
or sell a good or service (third party) and in which no
appropriate compensation is paid for them. Externalities
can cause market failure whether they are harmful
(negative) or even beneficial (positive); as some
economists claimed because markets provide too many
goods that produce negative externalities and too few
goods that create positive externalities, so as a
consequences these goods that create negative external
effects are produced because the cost imposed on those
who experience the negative externalities are not taken
into account in the production of the goods creating the
negative side effects. A translation would be; if the price
mechanism does not take into account the full social costs
and social benefits of production and consumption;
markets fail because firms take into account their private
cost and private benefits instead of social costs and
benefits, and in which will cause to make the marginal
social costs lower than firms’ private marginal costs.
Hence the market will fail to capture all the effects
involved in some transactions as well as market prices of
goods will fail to reflect all the costs and benefits
associated with these goods
Monopoly power is an example of market failure which
occurs when one or more of the participants have the
ability to influence the price or other outcomes in some
general or specialized market. The most commonly
discussed form of market power is that of a monopoly, but
other forms such as monopsony, and more moderate
versions of these two extremes, exist. Markets
participants that have market power are sometimes
referred to as "price makers", while those without are
."sometimes called "price takers
There are a Government function to provide a monopoly of
violence and judicial system to deprive people of their
liberty ,it’s a dangerous monopoly, but when it’s secure
and function with reasonable restraints against its
arbitrary use, citizens can safely carry on ordinary
economic and social activities, from this situation
satisfactory societies have system of checks and balance
designed to keep governments monopoly directed to
general goods, main Government action is to provide
security of property , define and enforce property rights
that give people a secure claim ,its include clear definition
and enforcement of the right and requirements of
institutions such as banks, insurance companies
Finally market is a complete system depend in each other
parties, consumer firms and third parties if one if them not
function well it effect the all here the government interfere
to make the balance required to keep market mechanism
.pushing microeconomic forward to all benefit