Introduction to Market Failures

Markets are thought to be the most efficient system for allocating society’s scarce resources. However, what if markets FAIL to achieve the efficiency we so desire as a society? Market failures arise when the free market quantity is either greater than or less than the “socially optimal” quantity of a good.

This lesson introduced different ways markets may fail to achieve a socially optimal level of output. In part 2 of this lesson we’ll explore in more detail one type of market failure: negative externalities of production.


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