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What can cause markets to fail? |
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When the allocation of resources in the economy by a free market is not efficient, economist consider this fact as market failure. In some cases, economists demontrate that the price given by the market are not necessery good that means do not reflect the real cost. In the normal supply curve we can observe in fact the private cost but in many case, these cost should be redefined to take into account the social cost of externalities. So, there are in fact two cost: the private cost supports by firms and a social cost which is not take in consideration by market. To summarize, when exist externalities (positive or negative), we should consider a new total cost as the sum of private and social cost.
First answer by ID1625879988. Last edit by ID3301682954. Question popularity: 8 [recommend question]
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