All Exams Test series for 1 year @ ₹349 only
Question

What are the major reasons for market failure ? Explain the role of the government in this context.

This question was previously asked in
UPSC CSE 2025 (Prelims) CSAT Official Paper (25-May-2025)

Market failure occurs when free markets fail to allocate resources efficiently, leading to sub-optimal outcomes for society. Major reasons include:

  1. Externalities: Costs or benefits imposed on third parties not involved in a transaction (e.g., pollution as a negative externality, vaccination as a positive one).
  2. Public Goods: Goods that are non-rivalrous (one person's consumption doesn't diminish another's) and non-excludable (difficult to prevent people from consuming them even if they don't pay), leading to the "free-rider" problem (e.g., national defense).
  3. Asymmetric Information: When one party in a transaction has more or better information than the other, leading to inefficient outcomes (e.g., used car market).
  4. Monopolies/Market Power: A single firm or a few firms dominating a market can restrict output and raise prices above competitive levels.

Government's role is to correct these failures. It uses taxes or subsidies to internalize externalities, provides public goods directly, regulates industries, enforces information disclosure, and implements antitrust laws to prevent monopolies, aiming to improve resource allocation and social welfare.

Answered By:

Sakshi Negi

Sakshi Negi is a Delhi-based journalist and content specialist with expertise in educational content and digital media, focusing particularly on government exam preparation and career guidance. With a degree in Journalism and Mass Communication from NRAI School of Mass Communication and her background as a Kendriya Vidyalaya alumna, she brings unique insights into the Indian education system and government sector opportunities.

Was this answer helpful?

Similar Questions

  1. Show that when prices and income increase in the same proportion, there will be no change in quantity demanded for a commodity in Marshallian approach.

  2. Interpret the slope of the IS curve. Why is IS curve normally negatively sloped?

  3. What is classical dichotomy ? Is it the same as neutrality of money? Explain.

  4. What are the determinants of velocity of money in Fisher's equation ? How does it differ from the Cambridge version of velocity of money? 

  5. Derive Marshallian demand curve for an inferior good in a two-commodity framework by using income and substitution effects. Is this demand curve always negatively sloped ? Explain.

  6. What is Scitovsky Paradox? Explain it in the context of Kaldor-Hicks compensation test.

  7. Define liquidity trap. Show that fiscal policy is fully effective in the horizontal part while the monetary policy is fully effective in the vertical part of the LM curve. Illustrate your answer graphically with economic reasons.

  8. How does the loanable fund theory become superior to the classical theory of interest?

  9. “The failure of classical full employment equilibrium paved the way for Keynes' theory of underemployment equilibrium." Discuss critically.

  10. Explain the effects of public spending on national income, if it is Financed through government borrowings.


Important Questions from Miscellaneous

  1. How will you manage a case of misplaced copper-T (Cu-T)? 

  2. Describe the embryogenesis, clinical features and principles of management of cleft palate.

  3. Write short notes in 150 words:
    Metagenesis

  4. Write short notes in 150 words:
    Book lungs

  5. Write short notes in 150 words:
    Paedomorphosis

Need Expert Advice?
Upcoming Exams
UPSC IFoS
November 22, 2026
UPSC SO Steno
December 12, 2026
Test Series
IAS img
UPSC
UPSC CSE (IAS) 2027 Prelims Mock Test Series
662 Tests 3 Tests Free
1705 Attempts
4.8(203)
English, Hindi
More Questions from IAS

Start Your Preparation with Prepp Mobile App

Download the app from Google Play & App Store
Download the app from Google Play & App Store
Prepp Mobile App