Market Failure : An Efficient Allocation Of Resources

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Market failure occurs when a free market fails to deliver an efficient allocation of resources. Market failure will lead to productive and allocative inefficiencies. So market failure happens when the competitive outcome of markets is not efficient from the point of view of society as a whole. There are many instances where the free market fails to achieve an efficient allocation of its resources. For example one way the market may fail would be negative externalities, this is where a transaction has a cost on a third party member who was not involved in the transaction, an example of this would be pollution as this is damaging the air that people breathe and this can be produced by a factory making goods which people do not buy yet they have to suffer with the pollution, this therefore causes the social cost of production to exceed the private benefit of production. Another example of market failure would be a monopoly, a monopoly is where a single firm owns all or nearly all of the market for a product, this cause’s market failure as it will lead to under-production and higher prices that wouldn’t exist if there was competition in the market as competition would drive the prices down. These examples would lead to market failure which would result in productive inefficiency, this is when a firm is not producing at its lowest unit cost. This would happen as the businesses are not maximising their output and their average costs will be high, this is due to the lack of
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