We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.

What Are the Causes of Market Failure?

Malcolm Tatum
Updated May 17, 2024
Our promise to you
WiseGeek is dedicated to creating trustworthy, high-quality content that always prioritizes transparency, integrity, and inclusivity above all else. Our ensure that our content creation and review process includes rigorous fact-checking, evidence-based, and continual updates to ensure accuracy and reliability.

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

Editorial Standards

At WiseGeek, we are committed to creating content that you can trust. Our editorial process is designed to ensure that every piece of content we publish is accurate, reliable, and informative.

Our team of experienced writers and editors follows a strict set of guidelines to ensure the highest quality content. We conduct thorough research, fact-check all information, and rely on credible sources to back up our claims. Our content is reviewed by subject-matter experts to ensure accuracy and clarity.

We believe in transparency and maintain editorial independence from our advertisers. Our team does not receive direct compensation from advertisers, allowing us to create unbiased content that prioritizes your interests.

Market failure is a situation in which the demand for a given product is not in sync with the supply that manufacturers are currently providing for sale. The failure may be in the form of a glut of available products that consumers are not purchasing at a pace that keeps up with the production, or involve a situation in which suppliers are unable to keep up with the current level of demand from consumers, creating a temporary shortage. There are several causes of market failure, with some having to do with pricing and quality, while others are connected to the current general state of the economy.

One reason for market failure has to do with externalities. These are simple factors that are outside the control of consumers or the companies producing the goods and services offered for sale. Examples of this include negative situations such as natural disasters that temporarily reduce production, or downturns in the economy that prompt consumers to greatly reduce their consumption of certain products. Positive events may also qualify as externalities, such as an economic recovery that increases consumer confidence and motivates increased purchases of non-essential and luxury products. In the former instance, companies may find that the demand for their products drops suddenly, leaving them with high inventories of finished goods that are not wanted at any price. The latter positive example may mean that, until producers can increase production to meet demand, they will not be able to adequately keep up with customer orders.

Other causes of market failure have to do with an imbalance between the price of a product and its perceived level of quality. Price and quality may create a positive or a negative situation, because if consumers think that the price is reasonable in relation to the quality, demand will be high. Unless producers can keep up with that demand, there is a failure to meet market expectations. At the same time, if consumers see the quality of the products as not being worth the purchase price, demand will drop and the producer is left with a large inventory. Depending on the nature of the products, it may be possible to reverse these problems by lowering the price to a level that consumers find more in line with the quality and begin to move the backlog of finished goods.

Markets that are controlled by monopolies can also cause some products to fail. When a particular market is dominated by one or two companies, this can make it extremely difficult for smaller competitors to build client bases and sell enough products to keep their operations viable. Setting production schedules based on unrealistic projections for demand can also lead to market failure.

Since so many different elements can affect the balance between supply and demand, many companies are constantly reviewing customer expectations and buying habits while also attempting to project how the economy will change in the months and years ahead. Doing so can aid in adjusting production accordingly and either prepare the company to meet increased demand or curtail production so that the business is not left with a glut of finished goods for which there is not a great deal of demand.

WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.
Discussion Comments
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.