Question

1. What is a market failure? Define the two important instances in which market failure can occur.

Answer 1

Market failure is nothing but an inefficient allocation of goods and services which usually happens in a free market system on the whole.

Two important instances in which market values regularly take place include

1) negative externality and this is an example for market failure because of the fact that there is an additional amount of cost that is levied on the third party or the society on the whole and for example pollution is one case of negative externality where the health effects are on the individuals and they have to bear the cost for it

2) Demerit good where smoking is an example of demerit good because there is lot of adverse effects of smoking as a result of which the third party of the society has to bear the cost of it