Welfare economics is the study of efficiency and equity of resource allocation. Allocative efficiency is the point at which allocations maximize total net benefits of society. Pareto efficiency or optimality is another way to measure efficiency. Developed by Vilfredo Pareto, (1848 - 1923) Pareto efficient allocation of goods occur when no other possible allocation makes at least one individual better [...]
In this article we will discuss about how negative externality becomes a source of economic inefficiency. Suppose John an ambitious rock musician, resort to the practice of playing electronic guitar, every day for five hours in his house. However John’s immediate neighbor, Peter does not enjoy listing to the ear-storming guitar notes. The practice time of John differs from socially [...]
This article throws light upon the various instances of market failure which calls for government intervention for correction. The instances are: 1. Externalities 2. Provision of Public Goods 3. Decreasing Cost 4. Uncertainty as a Source of Market Failure 5. The Distribution Function 6. Market Efficiency and Income Distribution. Market Failure: Instance # 1. Externalities: Externalities refer to spillover or [...]