Economic inefficiency

Experimental visualization of narrower problems
Other Names:
Imperfect market operation
Market imperfections
Lack of protection by free markets
Failure of markets
Economic inefficiencies due to restrictive business practices
Limitations of free markets

Free markets under provide public goods such as national defence, law and order, primary education, basic health, infrastructure, and research and development, namely goods that benefit people other than the producers or consumers. Equally markets can overproduce goods that impose costs beyond those borne by the producer: traffic congestion, pollution, the depletion of natural resources, etc. In addition the existence of monopolies, the lack of fully developed markets (especially for capital and insurance), and gaps in the supply of information may result in inefficient resource allocation and yield savings and investment rates that are less than optimal. Market mechanisms may thus produce insufficient growth as well as macroeconomic imbalances, such as balance of payments deficits and underemployment.

Restrictive business practices tend to interfere with the efficient use of economic resources and thus reduce economic growth and welfare, with particularly adverse effects on developing countries. Such practices include: cartel activities; export prohibitions; agreements on market distribution and allocation; tying of the supply of inputs including raw materials and components; restrictions specified in contracts for the transfer of technology; arbitrary transfer pricing between the parent company and its affiliates; monopoly practices.


In the 1990s, as Japan struggled to revive its economy and avert a global recession, it was under enormous pressure to make itself more efficient and thus stimulate a new burst of economic growth. But it found itself profoundly torn, for efficiency would come at the price of egalitarianism and other values that many Japanese regard as at least as important as economic growth.


Conventional economic wisdom holds that freedom of enterprise and the profit motive produce economic efficiency. This is correct to the extent that economic theory defines such efficiency in precisely the way that those intending to maximize the return on their investment would wish. But when efficiency is defined as applying existing productive capacity to meet existing human needs, then it is immediately apparent how inefficient the global economic system presently is.


Problem Type:
F: Fuzzy exceptional problems
Date of last update
07.10.2017 – 21:01 CEST