Figure 10-12 Price External benefit 21 22 Supply Line 1 Line 2 Quantity Refer to Figure 10-12. An alternative label for the quantity ₂ would be Oa.EXTERNAL Ob. PRIVATE OC.MARKET Od. OPTIMUM

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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.