Answer
The two main causes of market failure are externalities and market power. An externality is the
impact of one person’s actions on the well-being of a bystander, such as from pollution or the
creation of knowledge. Market power refers to the ability of a single person (or small group of
people) to unduly influence market prices, such as in a town with only one well or only one cable
television company. In addition, a market economy also leads to an unequal distribution of
income.
Work Step by Step
Read about externalities and market power in the sub section where it discusses about them.
