Define market failure What is externalities
Economics
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Market failure occurs when the allocation of goods and services by a free market is not efficient. This means that the quantity of a good or service produced or consumed is not the socially optimal level, leading to a loss of economic welfare.
Externalities are costs or benefits that affect a party who did not choose to incur that cost or benefit. They arise when the production or consumption of a good or service has an impact on a third party that is not accounted for in the market price.
- A negative externality imposes a cost on others (e.g., pollution from a factory).
- A positive externality confers a benefit on others (e.g., vaccination, which reduces disease spread).
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