The following graph represents the market for high-emissions cars. Answer this question assuming that the externality is not internalised. Price of high emissins vekides D. Sorial Value Quatty of high misiens vehicles What is the social cost of the last unit traded in the market? P1 O P2 P3 P4

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Market Failure Analysis

To understand Market failure, we need to first understand welfare economics. An Italian economist, Vilfredo Pareto stated that allocation of resources in an efficient manner such that an economic change, which harms no one and makes someone better off, indicates an increase in social welfare. It is also called Pareto Optimality, where resources cannot further be reallocated without harming one. This does not apply to those economic changes, which harm some and benefit others. social welfare increases if the utility of any of its members' increases and none decrease in the economy.