Download 1. Market Failure and Economic Efficiency

Market Failure and Economic Efficiency
Market failure is the failure of market forces to achieve an efficient allocation of
resources. Economic efficiency occurs when marginal benefit = marginal cost.
Marginal benefit: the additional benefit (utility) to a consumer from consuming
one more unit of a good or service. Marginal Benefit Curve = Demand Curve
Marginal cost: The additional cost to a firm of producing one more unit of a
good or service. The Supply curve is also the Marginal Cost curve.
Economic efficiency
A market outcome in which the marginal benefit to consumers of the last unit
consumed is equal to its marginal cost of production.
Marginal Benefit Equals
Marginal Cost Only at
Competitive Equilibrium
Causes of market failure
The causes of market failure can essentially be grouped into five main categories:
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2.
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The existence of negative externalities
The existence of positive externalities
The lack of public goods
Resource depletion & common access resources
The abuse of monopoly power (HL only)