1. Consider a competitive market where daily supply and demand are QP(P) = 15 -; and Q°(P) = 2P, where quantities are measured in thousands of units and prices are in dollars per unit. Assume that this market does not create any externalities – meaning that all costs and benefits are borne by the sellers and buyers directly involved in the market.

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Market Failure Analysis

To understand Market failure, we need to first understand welfare economics. An Italian economist, Vilfredo Pareto stated that allocation of resources in an efficient manner such that an economic change, which harms no one and makes someone better off, indicates an increase in social welfare. It is also called Pareto Optimality, where resources cannot further be reallocated without harming one. This does not apply to those economic changes, which harm some and benefit others. social welfare increases if the utility of any of its members' increases and none decrease in the economy.