What happens when markets do not work perfectly?
There are four basic market structures, each with different characteristics. Because only one of these structures is perfectly competitive, economists classify the other three as examples of imperfect competition and, therefore, as market failures.
What is perfect competition, and why do economists like it so much? Perfect competition is the most efficient and competitive market structure. It consists of many producers who provide identical goods, usually referred to as commodities. Prices are established by the interaction of supply and demand.
What is a monopoly, and why are some monopolies legal? A monopoly is the opposite of perfect competition. In a monopoly, a single producer provides a unique product and therefore has significant control over prices. The government permits certain kinds of monopolies to exist because they are believed to serve the public interest.
What is an oligopoly, and how does it limit competition? An oligopoly is a market dominated by a small number of producers who provide similar, but not identical, goods. Firms in an oligopoly often set prices based on other firms’ pricing decisions. Because oligopolies can dominate markets, their effect may be much like that of a monopoly.
What is monopolistic competition, and how does it affect markets? Monopolistic competition is a market in which many producers provide a variety of similar goods. Such markets are characterized by the use of nonprice competition to differentiate products and build brand loyalty. To the extent that firms “monopolize“ their own brands, they may have some control over prices, but such markets remain relatively competitive.
Market failures: What are externalities and public goods? Externalities are side effects of production and consumption. They may be positive or negative. Public goods are goods that are available for all people to consume, whether or not those people pay for the goods. Externalities and public goods are both symptoms of market failure.