What is meant by Market Failure?

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    What is meant by Market Failure?

    • Where markets work efficiently, the market mechanism produces the best allocation of resources
    • In reality, this doesn’t always happen, and in this case, market failure occurs
    • It is therefore said that markets ‘fail’

     

    Efficiency Revisited and the Concept of Inefficiency

    • Allocative efficiency is one type of efficiency
    • The other is productive efficiency
    • Productive efficiency can be explained in terms of production possibility curves

     

    • To re-iterate, any combination of production that is located on the PPE is one in which all available resources are being used efficiently
    • Any point within the PPC represents inefficient use of resources

     

    • Therefore, only when Allocative and productive efficiency are present can we conclude that scarce resources are being used in the most efficient way, from a consumer’s standpoint
    • This is economic efficiency

     

    • Inefficiency is therefore when resources are not being used in the best possible way
    • The products that people want aren’t being produced in the quantity that they desire at the prices that they are willing to pay

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