Market failure

Published on October 31, 2019   19 min

Other Talks in the Series: Introduction to Microeconomics

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Hi, I'm Dr. Sangaralingam Ramesh. Welcome to talk number 13 in this Henry Stewart Talks series: Introduction to Microeconomics. In this talk, we'll be discussing and analyzing market failure.
So what is market failure? Market failure results when a free market fails to deliver an efficient allocation of resources. In other words, where supply meets demand, the allocation of resources is not efficient. This may result in a loss of economic and social welfare where the social costs are greater than the cost to the firm. We can also say that market failure occurs when the outcome of the market does not meet society's needs.
So in the context of the nature of market failure, this can be analyzed using a demand curve and a supply curve which can be seen in this diagram, where we have price and costs on the vertical y-axis and the quantity of output on the horizontal x-axis. We have the upward sloping market supply curve which can be derived from each individual firm's marginal cost curve, which is part of the firm's marginal cost curve, which is above its minimum average cost. By adding together each part of the module cost curve of each firm, which is above the minimum average cost, we get the market supply curve. The market demand curve is downward sloping and this can be derived from the individual firm's marginal benefit curve. Where these two curves meet, demand and supply, we have the equilibrium price, Pe, and equilibrium quantity, Qe. However, although this represents market equilibrium, it may not be in society's interests that the firm may be either producing too much of the quantity of the good Q or too little of the quantity of the good Q. So in this case, where society's needs are not matched by those of the market, we say that there is market failure.