Definition: A situation, usually discussed in a model not in the real world, in which the behavior of optimizing agents in a market would not produce a Pareto optimal allocation. Sources of market failures:
- Monopoly. Monopoly or oligopoly producers have incentives to underproduce and to price above marginal cost, which then gives consumers incentives to buy less than the Pareto optimal allocation.
- Externalities
Journal Articles on Market Failure:
- [link url=http://www.jstor.org/pss/1816983]The Vertical Integration of Production: Market Failure Considerations
- The Anatomy of Market Failure
- The selection principle and market failure in systems competition
