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Market failure occurs when the price mechanism fails to produce the goods consumers want. The Pareto optimum is not achieved. There is no productive or allocative efficiency.

Efficiency

Productive efficiency occurs when firms produce at the lowest possible average cost. To achieve this, firms must exploit economies of scale and minimise wastage of resources.

Allocative efficiency is achieved when products are made in the correct quantities to best satisfy consumer wants and needs. This occurs when the marginal cost of an item is equal to the market price. (p=mc))

Another definition of allocative efficiency is the position where no one can be made better off without making someone else worse off. Such a point is a Pareto Optimum, named after Vilfredo Pareto. Any point on the curve of a PPF has Pareto optimality.

Causes of market failure

1. Merit and de-merit good
2. Positive and negative externalites
3. Pubic and quasi public goods
4. Occupational and geographical immobility of labour
5. The concentration of power within markets
6. Concerns about distrobution and equity

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