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Therefore, the market equilibrium, where demand meets supply, is also where the marginal social benefit equals the marginal social costs. At this point, the net social benefit is maximized, meaning this is the allocative efficient outcome. When a market fails to allocate resources efficiently, there is said to be market failure.
In neoclassical economics, market failure is a situation in which the allocation of goods and services by a free market is not Pareto efficient, often leading to a net loss of economic value. [ 1 ] [ 2 ] [ 3 ] The first known use of the term by economists was in 1958, [ 4 ] but the concept has been traced back to the Victorian philosopher Henry ...
In welfare economics, the theory of the second best concerns the situation when one or more optimality conditions cannot be satisfied. [1] The economists Richard Lipsey and Kelvin Lancaster showed in 1956 that if one optimality condition in an economic model cannot be satisfied, it is possible that the next-best solution involves changing other variables away from the values that would ...
A market can be said to have allocative efficiency if the price of a product that the market is supplying is equal to the marginal value consumers place on it, and equals marginal cost. In other words, when every good or service is produced up to the point where one more unit provides a marginal benefit to consumers less than the marginal cost ...
In economics, non-convexity refers to violations of the convexity assumptions of elementary economics.Basic economics textbooks concentrate on consumers with convex preferences (that do not prefer extremes to in-between values) and convex budget sets and on producers with convex production sets; for convex models, the predicted economic behavior is well understood.
The concept was first explored in an essay of the same name, published in 1966 by the American economist Alfred E. Kahn. [1] The article describes a situation where a series of small, individually rational decisions can negatively change the context of subsequent choices, even to the point where desired alternatives are irreversibly destroyed.
Used cars market: due to presence of fundamental asymmetrical information between seller and buyer the market equilibrium is not efficient—in the language of economists it is a market failure. Around the 1970s the study of market failures came into focus with the study of information asymmetry. In particular, three authors emerged from this ...
A classic example of a missing market is the case of an externality like pollution, where decision makers are not responsible for some of the consequences of their actions. When a factory discharges polluted water into a river, that pollution can hurt people who fish in or get their drinking water from the river downstream, but the factory ...