Market Failure

Allocative Efficiency - Where consumer satisfaction is maximised. At the equilibrium.

Market Failure - Occurs when the free market mechanism fails to allocate resources in an efficient manner.

Negative Externalities - A cost that is external to the market transaction and thus is not reflected in market prices. Something created but not paid for by the market that is a negative.

Primark Cotton T-shirt example

Private Costs

A cost incurred by an individual as part of its production or other economic transactions.

The firm's private costs:

• Cost of growing cotton
• Cost of manufacturing the t-shirt
• Shipping costs
• Rent of stores
• Wages of store staff

The consumer's private costs:

• Price of the t-shirt

External Costs

A cost that is associated within economic an transaction that is borne by a third party. This third party is often the government.

• Health services to pay for pollution / health issues
• Unemployment from fishing
• Cost of bringing in more water / cost of cleaning up water

Pollution Example

MPC - Marginal Private Cost
MSB - Marginal Social Benefit
MSC - Marginal Social Cost (MPC + Marginal External Cost)
Welfare Loss - Loss to society, filled in on diagram

Negative Production Externality

MSC > MPC