Missing market

Missing market refers to a situation in which there is no market for a particular good or service, often due to market failures, regulatory constraints, or other economic barriers that prevent the establishment of such a market.
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Updated: Jun 25, 2024

3 key takeaways

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  • A missing market occurs when goods or services that could theoretically be traded are not available due to various impediments.
  • Factors such as information asymmetry, externalities, public goods, and regulatory barriers often contribute to the absence of a market.
  • Addressing missing markets can involve policy interventions, creating new institutions, or improving existing market mechanisms.

What is a missing market?

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A missing market exists when a good or service that could be beneficially exchanged in a market setting is not traded because of various obstacles or inefficiencies. This absence can lead to suboptimal allocation of resources and unmet needs or demands. Missing markets are often a result of market failures, where the conditions necessary for a well-functioning market are not present.

Causes of missing markets

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Information asymmetry

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When one party in a transaction has more or better information than the other, it can lead to market failures. For example, in the insurance market, if insurers cannot accurately assess the risk of potential customers, they might refuse to offer insurance, leading to a missing market for certain types of coverage.

Externalities

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Externalities occur when the actions of individuals or firms have effects on third parties that are not reflected in market prices. Positive externalities, like public health benefits from vaccination, or negative externalities, like pollution, can lead to missing markets. In these cases, the private market fails to account for the full social costs or benefits, leading to under-provision or non-provision of certain goods and services.

Public goods

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Public goods are non-excludable and non-rivalrous, meaning that one person’s consumption does not reduce availability for others, and it is difficult to exclude anyone from using them. Classic examples include national defense and clean air. Markets often fail to provide public goods because it is challenging to charge individuals directly for their use, leading to free-rider problems and missing markets.

Regulatory barriers

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Government regulations can sometimes create missing markets by imposing restrictions that prevent the free exchange of goods and services. For example, stringent regulations on pharmaceutical drugs can delay the introduction of new medications, effectively creating a missing market for those treatments.

High transaction costs

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When the costs of making an exchange are too high relative to the benefits, markets may not develop. High transaction costs can include costs related to finding trading partners, negotiating terms, enforcing contracts, and transportation.

Examples of missing markets

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Environmental markets

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Markets for trading pollution permits or carbon credits can be missing in some regions due to lack of regulatory frameworks or enforcement mechanisms. Without these markets, there is little economic incentive for businesses to reduce their emissions, leading to environmental degradation.

Health insurance

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In some countries, private health insurance markets might be missing for high-risk individuals because insurers cannot accurately price the risk or are unwilling to cover it. This results in a lack of access to necessary health services for those individuals.

Financial services

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In developing countries, markets for certain financial services, like credit for small businesses, may be missing due to high risks, lack of collateral, and insufficient financial infrastructure. This can stifle economic development and growth.

Addressing missing markets

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Policy interventions

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Governments can address missing markets by implementing policies that reduce information asymmetry, internalize externalities, and provide public goods. For instance, subsidies, taxes, and regulations can help create markets where they otherwise would not exist.

Creating institutions

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Establishing new institutions, such as commodity exchanges or microfinance institutions, can help overcome barriers that prevent markets from forming. These institutions can reduce transaction costs, provide information, and facilitate trade.

Improving market mechanisms

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Enhancing existing market mechanisms, such as improving legal frameworks for contract enforcement or reducing transaction costs through technology, can help develop markets. For example, digital platforms can lower the costs of matching buyers and sellers, facilitating the creation of new markets.

Public provision

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In cases where markets are unlikely to form due to the nature of the good or service (such as public goods), direct public provision by the government may be necessary. This ensures that essential services and goods are available to the public even in the absence of a private market.

Related Topics:

  • Market failure
  • Public goods
  • Externalities
  • Information asymmetry
  • Regulatory economics

Exploring these topics will provide a deeper understanding of the conditions under which markets may fail to develop and the potential solutions for addressing missing markets to improve resource allocation and economic efficiency.



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Arti
AI Financial Assistant
Arti is a specialized AI Financial Assistant at Invezz, created to support the editorial team. He leverages both AI and the Invezz.com knowledge base, understands over 100,000... read more.