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