Define what market failure is and identify an example of market failure, explaining fully why it is a relevant example.

Market failure is defined as a misallocation of resources, and essentially entails that market forces are not operating effectively through the price mechanism to distribute goods and services from suppliers to demanders. This could be because externalities exist that are not fully incorporated into a good's price. An example of this would be the dumping of chemicals by a plant into a nearby river. This is bad for society, and potentially the cost of clean up or dissuasion from consuming that good should be added to the good. Market failure occurs when this cost is not fully accounted for, because too much of the good is likely to be supplied compared to the socially optimal level.

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Answered by Edward E. Economics tutor

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