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Market Failure

Can markets fail?

When markets don’t function properly, we have what “economists refer to as market failure” (McConnell, Brue, & Flynn, 2012, p. 92). Market failure happens on either the supply or the demand chain. If consumer’s readiness to pay is not fully considered, it creates a demand-side failure. Alternatively, if costs do not reflect the total costs in creating an item, it creates a supply-side market failure. Either way, the market is not operating at optimum efficiency, and that’s not good for anyone.

In my opinion, the biggest market failure in my lifetime is the real estate market crash of 2006. “America’s ongoing subprime mortgage crisis first emerged in 2006 with the bursting of the “housing bubble.” As home prices declined and mortgages adjusted upward, millions of Americans found themselves at risk of losing their homes” (Feinstein, 2011, p. 5). Millions of borrowers, lured in by the promise of sub-prime lending rates, faced disaster as housing prices dropped and interest rates rose. This crisis has had global affects, and we’re still feeling the crunch from this market failure today as unemployment continues to rise, and housing costs continue to fall.

The government has poured billions of dollars into the pot in an effort to stave off a full-on depression as a result of the real estate market crash. It hasn’t been enough. The best thing they can do at this point is try to prevent it from happening again. “The SAFE Mortgage Licensing Act is intended to address growing reports of abusive lending practices by unscrupulous mortgage industry participants” (Feinstein, 2011, p. 9). Let’s hope this is enough.


Feinstein, D. (2011, Apr.). Mortgage Fraud and America’s Foreclosure Crisis. Retrieved Aug. 29, 2012, from

McConnell, C., Brue, S., & Flynn, S. (2012). Economics principles, problems, and policies. New York, NY: McGraw-Hill Irwin.