Question

Explain how a “market failure” can produce a macroeconomic “non-optimal output mix”. Cite a specific example of a real-world “market failure” in your explanation. Prepare a graph that displays a production possibilities curve to illustrate your explanation. (Develop your own graph/curve; do not copy/paste from another source.)

Answer 1

A market failure is a situation where the market is not able to select the optimal combination of goods which are desired from the societal viewpoint. The market may be producing an efficient quantity with using all the resources of the nation and making the best use of the available technology.

But somehow the market outcome remains suboptimal. In the diagram, the market outcome results in too many guns and too few butter at Q while the society demanded a more or less equal production of both the goods at R

A specific example of a real-world “market failure” is the health insurance market in USA or the housing bubble that failed to allocate resources and produced too many homes and too few health insurances in the nation.