Defining Market Failure

how do you define market failure? if i were to say that market failure refers to the free market being unable to achieve economic(allocative and productive) efficiency in the absence of govt intervention then for the case of income inequality, is it considered a market failure? (given that the market does allocate resources efficiently except that it isn’t a satisfactory allocation. :/

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5 MOL! – Allocative Efficiency

If every point on the PPC is productive efficient, are all the points equally good?

ACOn the diagram, points B and C are productive efficient as all the resources are fully utilised. This doesn’t help answer the economic problem of what and how much to produce. Should the economy produce at point B, C or on some other point? Hence, another yardstick is required to measure the efficiency of the economy.

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Allocative Efficiency

Allocative efficiency is defined as a situation where a combination of goods and services that maximises society’s welfare is produced and consumed, for a particular distribution of wealth.

In H2 economics, you learn that the free market achieves allocative efficiency in the absence of market failure. This is easily seen from diagrams where you show how the consumer and producer surplus are maximised.

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