Factor leading to market failure: Inefficiency

Market failure occurs when the price mechanism has failed to achieve efficiency in resource allocation and equity in income and wealth distribution.

Economic efficiency is only achieved when it is not possible to change the existing allocation of resources in a way that makes one person better off without making someone else worse off.
This can only be achieved when productive efficiency and allocative efficiency is met.

Looking into allocative efficiency, we must ensure that every sector in the market produces an output whereby MSB = MSC. Only at this output level, will then the sum of consumer and producer be maximized, leading to yet another maximization of soceity's welfare.

Under perfect competition and no externalities, there would be no divergence between private and social costs and benefits---------> MPB=MSB, MPC=MSC.
The result is that the market equilibrium output coincides with the socially optimum output and hence the resources in the market would be used efficiently.

However, if MSC was to exceed MSB, it would lead to a welfare loss and hence a situation of allocative inefficiency where the soceity's welfare is not maximized.

In conclusion, it is vital for the government to ensure that the society's welfare is maximized in order for the market to progress. He should focus on the inefficieny in resource allocation if there is any to correct market failure.

Debra Peh