Introducing Market Failure

Market failure occurs when the price mechanism fails to account for all of the costs and benefits necessary to provide and consume a good.

Market failure occurs due to inefficiency in the allocation of goods and services.

An externality is a cost or benefit that affects an otherwise uninvolved party who did not choose to be subject to the cost or benefit.

Economic efficiency is the use resources to maximize the production of goods; externalities are imperfections that limit efficiency.