Suppose Hawi lives alone. She has two pet hamsters; she likes the hamsters because they are cute.  But cleaning their cage every day is a hassle. In this case, Hawi's hamsters entail: A. an external cost B. a negative externality C. an external benefit D. neither an external cost nor an external benefit

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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.