Answer to Question #125079 in Economics for Joseph Danso

Question

Identify four (4) main market failures in the agricultural credit market that make agricultural financing a challenge in developing countries. Explain how these market failures can be solved.

Answer 1

Market failure occurs when the price mechanism fails to account for all of the costs and benefits necessary to provide and consume a good. The market will fail by not supplying the socially optimal amount of the good.

The main four market failures are:

1. Positive and negative externalities: an externality is an effect on a third party that is caused by the consumption or production of a good or service.
2. Environmental concerns: effects on the environment as important considerations as well as sustainable development.
3. Lack of public goods: public goods are goods where the total cost of production does not increase with the number of consumers.
4. Underproduction of merit goods.