Question

a. What is a market failure? Define the two important instances in which market failure can occur.

b. What is the social value of a good include in the presence of positive externality?

Answer 1

A) Market failure is a when the allocation of goods and services by a free market is not efficient and this will lead to social welfare loss.

Market faliure is mostly associated with public goods, principal agent problems ,externalities,information asymmetries,non-competitivr market etc.

Market faliure existed because of self -regulatory organizations ,government institutions intrrvenue in a particular market.government interventions may lead to an inefficient allocation of resources.

B) positive externality means when the consumption of good causes benefit to third party.with positive externalities the benefit to society is greater than personal benefit.hence with a positive externality social benefit is greater than private benefit.social benefit is equal to the total of private benefit and external benefit.positive externalities result in inefficient market outcome.goods that suffer from positive externalities provide more value to individual in society than is taken into account by those providing the .