Consequences of Market Failure

• Market failure can lead to consequences such as retrenchment, unemployment, economic depression, a rise in the level of poverty, and a decline in the provision of societal welfare
• Retrenchment

  Workers losing their jobs due to the declining activity of a firm
• If a firm producing a negative externality is forced to reduce output or close down


  Retrenchment will occur as the firm uses less factor inputs
• If monopolies reduce activities due to government restrictions

  Retrenchment will occur
• Unemployment


  Workers who are actively seeking jobs but are unable to find one
• If the market fails to provide merit goods such as education


  Workers will be unable to develop new skills, the poor will receive no education or training for jobs, and lack of healthcare can result in more days lost by workers due to sickness
• Absent workers


  Lead to a fall in productivity, and employers will substitute capital for labor, causing unemployment to grow
• Economic depression


  A fall in output in the economy and rising unemployment
• Market failure leads to economic depression

  As monopolies and firms producing negative externalities reduce output, leading to unemployment if the government does not provide public goods and merit goods
• Poverty


  Both absolute and relative poverty can increase due to market failure
• Social welfare


  The government's provision of public goods and merit goods, as well as subsidized education, healthcare, and training programs, to help citizens
• When there is market failure, the government has to intervene and use its resources to provide public goods and merit goods, as well as support firms producing positive externalities