Misallocation of resources

What is market failure?

The inability of the market system to allocate resources efficiently.

Give an example of market failure

A factory that pollutes a river is not taking into account the costs of that pollution on people who use the river for fishing or recreation.

The factory has lower costs than it should, leading to overproduction of goods.

What does misallocation of resources lead to?

• Reduced productivity

• Wasted resources

• Lost economic welfare

How can misallocation of resources caused by market failure be corrected?

Through taxes, subsidies, regulations and price controls.

e.g. to correct externalities or lack of competition.