Question

Why does the construction of a bridge over a river represent a market failure but the construction of an Apartment building does not

Answer 1

Market failures are associated with allocative resource efficiency. This is an explanation in classical microeconomic theory to explain situations of exception when private enterprise in a free market system does not allocate resources to the best of its ability. Recalling that by classical microeconomic theory, it is private initiative that allocates resources in the best way, so that the government acts only as a regulator. Thus, private initiative would be able to produce and market goods and services at the lowest cost, that is, more efficiently than if the government acted in the market.

The reason for market success or failure in liberal economies is the prospect of profit. Building apartment buildings is highly profitable, so market parameters work perfectly. Construction firms will strive to build apartments that are appealing to consumers at the lowest possible cost and thus make a profit. However, building a bridge under a river does not bring a prospect of profit, except in the case of toll bridge privatization. It is an infrastructure work necessary to facilitate the transportation of products and people. Therefore, in this case, there is no efficient allocation of resources by the market as there is no prospect of profit. This is the market failure. In this case, it is the government that acts in the construction of the bridge, in order to solve the market failure.