Market failure explanation
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Market failure occurs when the free market does not allocate resources efficiently to maximize societal welfare. It happens when the market output level does not coincide with where marginal social costs equal marginal social benefits. This means the market overproduces or underproduces a product compared to the efficient level where welfare is maximized. Market failure definitionally refers to situations where the allocation of resources by the market mechanism is inefficient.
Market failure explanation
- 1. MARKET FAILURE PREPARED BY SANDREA BUTCHER
- 3. • Welfare is maximised when resources are allocated efficiently. • This means that for each additional unit of output produced, the extra cost incurred is equal to the extra benefit enjoyed (SMC=SMB). Everyone is up here
- 4. DIAGRAMMATICALLY SMC SMB QA Q P,C,B Welfare is maximised at QA, which is the intersection of SMC and SMB.
- 5. SO WHAT IS MARKET FAILURE?
- 6. DEFINITION • Market failure refers to cases where the market output occurs at a level which does not coincide with maximization of welfare. • The allocation of resources will be inefficient. • This means that the market either overproduces or under produces the product. Suzie next door always has lemonade left over. She is such a failure.
- 7. • Anytime that output occurs at a level where SMC ≠ SMB the market will fail. You will never be my equal.