What is market failure?

Market failure describes cases where buying and selling at market prices produces too much of some things, too little of others, or an unfair or unstable result. Common causes are externalities, public goods, market power and unequal information. Spotting the cause matters because the right correction differs depending on what went wrong.

How it works

A market works well when prices carry all the relevant costs and benefits and when buyers and sellers are many and informed. A failure appears when one of those conditions breaks. If a cost is not priced, output exceeds what is best. If one seller controls supply, the price rises and the quantity falls. If a buyer knows less than the seller, bad deals pile up.

A correction carries its own trade-offs. Rules, taxes, subsidies and public provision can fix the gap, but they can also create delays, costs or new distortions. A good analysis therefore compares the size of the failure with the size of the side effects of the fix.

Example

Say a town has a single water supplier that can set any price it likes. In an open market the price would settle at 2 per unit and 1,000 units would be sold. As a sole seller, it raises the price to 3, and only 700 units are sold because some households cut back. The 300 units no longer sold were worth more to buyers than they cost to produce, so value is lost. A price cap at 2 would bring those sales back. The numbers are invented for illustration.

How to model it in Machinations

Build a Source for water production, a Converter for the supplier's pricing, and a Pool of households' unmet demand. Use a Register to calculate quantity sold from the price Lever, with a state connection so that a higher price reduces demand. Add a Lever for a price cap. Play with the cap off and then on, and chart sales volume and unmet demand to see what the failure costs and what the correction recovers.