Deficiency of information to the parties involved, or there may be asymmetric information (with its

Corresponding problems of adverse selection, moral hazard and agency costs). Or, the necessary

Transaction may be deterred by the fact that the efficient price is not set — on account of menu

costs. Or, there may be strategic behaviour by the individuals involved, who fail to engage in a trade,

in the hope that they might extract a better deal from their adversary if they “play it tough.” A large

number of “missing trades” are those involving the many resources over which no properly defined

Property rights exist (such as clean air) and thus over which no trade can occur. The second main

Category of market failures derive from the fact that there are sometimes collective interests that are

Unable to be served by self-interested, individual behaviour. There are goods or services that have to

Be consumed collectively (public goods like defence); there can be free-rider problems in which,

For example, citizens hope to avoid paying for a service on the grounds that someone else will pay

(why should I invest in innovation, if someone else will do it for me?); there can be prisoner’s

Dilemma-type situations, in which selfish behaviour leads to sub-optimal outcomes (particularly

Apt in areas where utility is a function of relative position, rather than absolute position). There can