What is meant by Market Failure?

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