An explanation of the concept of market failure

1. MARKET FAILURE
PREPARED BY SANDREA BUTCHER

2. WELFARE MAXIMISATION

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.