The meaning of market failure

Market failure as a failure to allocate resources efficiently

Market failure: occurs when the condition for the market is allocatively inefficient, resulting in an over-allocation of resources or an under-allocation of resources. 

• More (or less) is sold at a lower (or higher) price than is socially desirable.

Marginal private benefits: is the extra benefit to the entity consuming or producing one additional unit.

Marginal social benefits: is the private benefit to the entity plus the spill-over benefits to third parties of consuming or producing one additional unit.

Marginal private costs: is the extra costs to the entity consuming or producing one additional unit.

Marginal social costs: is the private costs to the entity plus the spill-over costs to third parties of consuming or producing one additional unit.