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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: 1. 2. 3. 4. 5. 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)