Missing Market

Published Mar 22, 2024

Definition of Missing Market

A missing market refers to a situation where a market for a good or service does not exist, often due to the failure of market conditions to support its establishment or because externalities prevent its formation. This can occur when the benefits of a good or service extend beyond the immediate buyer and seller, leading to social benefits or costs that are not reflected in market transactions. As a result, some goods or services that could contribute to societal welfare are underprovided or not provided at all by the private market.

Example

Consider public goods such as national defense, street lighting, or clean air. These are classic examples where markets often fail to form. The reason is that such goods are non-excludable (you cannot prevent anyone from using them) and non-rivalrous (one person’s use does not reduce availability for others). For instance, once a country is defended, it benefits all citizens irrespective of their contribution to its cost. Similarly, street lighting on a public road benefits all residents in the area, regardless of who pays for the electricity. This scenario often leads to the “free rider problem,” where individuals have no incentive to pay voluntarily for a good they can use without contributing to its cost, resulting in the good being underprovided by the market.

Why Missing Markets Matter

Missing markets matter because they highlight areas where the private market does not efficiently allocate resources to meet societal needs. The absence of these markets can lead to inefficiencies and lost welfare for society as a whole. For example, the lack of a market for clean air can lead to over-pollution, which carries health and environmental costs not accounted for by private entities. Recognizing missing markets is crucial for policymakers who must then decide whether to intervene, either by providing the good or service directly, regulating to encourage its provision, or using instruments like taxes and subsidies to adjust for externalities and align private incentives with social welfare.

Frequently Asked Questions (FAQ)

How can governments address the issue of missing markets?

Governments can address missing markets through various policy tools. They can provide public goods directly, funded by taxation, ensuring that goods with significant social benefits are available to all. Subsidies can encourage the production of positive externalities, while taxes or regulations can mitigate negative externalities. Governments may also create artificial markets for externality-causing activities, such as cap-and-trade systems for carbon emissions, encouraging market-based solutions to otherwise unaddressed problems.

Why might purely private solutions to missing markets be insufficient?

Purely private solutions to missing markets often fail due to the nature of goods involved and the free rider problem. Without a mechanism to ensure that users of a good or service contribute to its cost, the provision may be insufficient or absent in a private market scenario. Moreover, the costs or benefits to society of certain goods or activities may not be fully reflected in private transactions, leading to overuse of harmful goods or underuse of beneficial ones.

Can the concept of missing markets apply to digital goods and services?

Yes, the concept of missing markets can also apply to digital goods and services, particularly in areas of privacy, data security, and information goods with high social value but difficult monetization paths. For example, accurate and unbiased news content has a high social value but faces challenges in private markets due to preferences for sensationalism or free content, leading to underprovision of quality journalism. Here, the market for unbiased, thorough reporting could be considered “missing” due to the challenges in capturing its social value through direct sales or advertising.

Are there any examples of successful interventions in missing markets?

One notable example is the market for vaccines, particularly for diseases that predominantly affect lower-income countries. Initially, there was a missing market for such vaccines due to low profitability, despite their high social value. Through a combination of public funding, subsidies, and partnerships between governments, non-profits, and pharmaceutical companies, markets for these vaccines have been effectively created, ensuring broader global health security and addressing a key missing market issue.