Everything about Missing Market totally explained
A
missing market is a situation in
microeconomics where a competitive
market allowing the
exchange of a
commodity would be
Pareto-efficient, but no such market exists.
Examples
A variety of factors can lead to missing markets:
A classic example of a missing market is the case of an
externality like pollution, where decision makers are not responsible for some of the consequences of their actions. When a factory discharges polluted water into a river, that pollution can hurt people who fish in or get their drinking water from the river downstream, but the factory owner may have no incentive to consider those consequences.
Coordination failure can also prevent market formation. Again considering the pollution example, downstream residents might seek to pay the factory owner not to pollute their water, but because of the
free rider problem it may be difficult to raise the money.
Another barrier to pollution markets could be
technology. If the river has several factories along its banks, it may be difficult or impossible to monitor which factory is responsible for downstream pollution.
High
transaction costs might also deter market formation. It may be the case that both sides could benefit from an exchange of goods, but that setting up such an exchange is prohibitively expensive.
Markets can also be missing if there's a failure of
trust or
information. In non
zero-sum interactions, it's possible that the
Nash Equilibrium for individuals acting independently will be sub-optimal, in that both parties could benefit from cooperating, but on their own will choose not to. An example could be a shortage in footwear, where one person would like to open a factory to make shoes, and the other would like to produce socks, but because they're
complementary commodities, neither has incentive to start producing unless he knows that the other will do the same (see also:
prisoner's dilemma). The same applies to alternative automotive fuels: few filling station owners will be interested in offering the fuel until alternate-fuel cars are on the road, but people won't buy alternate-fuel cars until filling stations exist to service them.
Solutions
In many cases of missing markets, it may be possible for the government or another actor to create circumstances that make market exchange possible. In the case of pollution, one popular solution is for the government to assign
property rights in order to allow
Coase Bargaining. In cases of information failure,
futures markets can help to signal willingness to cooperate.
Further Information
Get more info on 'Missing Market'.
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