Some markets can fail due to the nature of certain goods, or the nature of their exchange. For instance, goods can display the attributes of public goods or common-pool resources, while markets may have significant transaction costs, agency problems, or informational asymmetry. In general, all of this situation can produce inefficiency, and a resulting market failure. A related issue can be the inability of a seller to exclude non-buyers from using a product anyway, as in the development of inventions that may spread freely once revealed. This can cause underinvestment, such as where a researcher cannot capture enough of the benefits from success to make the research effort worthwhile.
Natural monopoly, or the overlapping concepts of “practical” and “technical” monopoly, is an extreme case of failure of competition as a restraint on producers. The problem is described as one where the more of a product is mad, the greater the unit costs are. This means it only makes economic sense to have one producer.
The actions of agents can have externalities which are innate to the methods of production, or other conditions important to the market. For example…when a firm is producing steel, it absorbs labor, capital and other inputs, it must pay for these in appropriate markets, and these costs will be reflected in the market price for steel. If the firm also pollutes the atmosphere when it makes steel, however, and if it is not forced to pay for the use of this resource, then this cost will be borne not by the firm but by society. Hence, the market price for steel will fail to incorporate the full opportunity cost to society of producing. In this case, the market equilibrium in the steel industry will not be optimal. More steel will be produced than would occur were the firm to have to pay for all of its costs of production. Consequently, the marginal social cost of the last unit produced will exceed its marginal social benefit.
Common examples of externality are environmental harm such as pollution or over-exploitation of natural resources.
Traffic congestion is an example of market failure, since driving can impose hidden costs on other drivers and society. Solutions for this include public transportation, congestion pricing, toll roads and toll bridges, and other ways of making the driver include the social costs in the decision to drive. Some of these ideologies work well in a metro-plex environment…however in rural America, not so much.