It is almost a truism that the principal rationale for public policy intervention lies in the inadequacies of market outcomes. Yet this rationale is really only a necessary, not a sufficient, condition for policy formulation, (Sidgwick 1901, Cairncross 1976). The “anatomy” of market failure provides only limited help in prescribing therapies for government success, (McKean, 1964).The first known use of the term by an economists was in 1958, but the concept has been traced back to the Victorian philosopher Henry Sidgwick, (Stephen G. Medema, 2007, Francis M. Bator, 1958). Non-market organizations are supposed to be an antidote for market failures but they fail themselves. Likewise, the government’s failure to intervene in a market failure that would result in a socially preferable mix of output is referred to as passive Government failure (Weimer and Vining, 2004). Government intervention in market failures normally renders markets vulnerable. This paper seeks to explain market failure and non-market failure, distinguishing market failure from non market failure and also discussing how the role of non-market failure may be used to argue against the government in trying to come between market failures.

Market Failure

It exists whenever a free market allocation of goods and services is not the best one from a social point of view. In a free market allocation system, if we consider the car market and assume demand and supply of cars match, meaning the car market is in equilibrium. This shows free market allocation has worked, but it can also be said that, it has not be desirable in the social point of view because cars cause congestion, pollution, accident and a lot of noise. This can be called market failure. In the health market, if it is assumed that the demand and supply for health has met, it means equilibrium and free market allocation has worked. That allocation is not always desirable from the social point of view. If there is a presence of market failure, allocative efficiency is attained when MSB is equal to MSC, where MSC is the Marginal Social Cost and MSB is the Marginal Social Benefit derived from a good or service. If healthcare cannot be accessed by half of a population in a country, it means the market has failed. Free market allocation suggests that consumers weigh their marginal cost and marginal benefits and make a good decision to purchase where they match. An example is, what an individual gains from buying a new car and whether if it is worth that price. In the same way, a producer weighs up his marginal cost and marginal benefits and makes a decision to produce where they match, that is where they make profit. An example is what the producer gains in producing a new Volvo, if it is worth the additional cost. When the market mechanism fails to deliver the best level of output for the society then non-market forces have to step in. If these non-market forces also fail then we have non-market failures.

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Examples of market failures

Externalities

An externality, or transaction spill over, is a cost or benefit that is not transmitted through prices (Hanming Fang, Duke University),and is incurred by a party who was not involved as either a buyer or seller of the goods or services causing the cost or benefit (Bishop Mattthew 2012). They occur when an individual externally incur a gain or cost during economic activities but are not considered by buyers and sellers involved because external cost and benefit affect third parties and not them. When a customer wishes to buy or sell a product, he only considers his private benefits whiles he does not consider external cost and benefits. By ignoring external cost and benefits he leads others through the market mechanism to the wrong level of output in the market. The tobacco and alcohol industry are example of markets that create negative externalities. These industries create negative externalities because they create external cost and get overproduction in their markets. Non-market forces have to step in to try to remove or reduce these externalities.

Price Mechanism

If the price mechanism was to handle certain markets, some particular goods will never be produced because everyone will be waiting for someone else to buy and supply the product. An example is the light got from light houses, firework display or traffic light. These goods are public goods and possess non-rivalry and non-excludability available for the other. This creates a problem where everyone will want to use the product but will wait until someone else has paid for it so as to use it freely. Consequently, if no one buys the product, the market will be missing from the economy if we left it to market forces. Again non-market forces have to correct this situation.