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Market efficiencies and inefficiencies happen all around us. Consider the definition of perfect competition and give an example from your personal life.

Now, consider the four sources of market failure (see chart below) and examine how each led to an inefficient allocation of resources. Take a moment to look around you and give an example for each of the four sources of market failure. Why do you feel these are good examples?

It is extremely difficult for some businesses to meet all the conditions of the perfectly competitive market structure. When this happens, market failure occurs. The result is inefficiencies in the allocation of resources. There are four sources of market failure:

Imperfect market structure When businesses are no longer price takers, but they have some control over price and potential competition. This usually results in higher prices and more restricted production than in a perfectly competitive market structure. The formula representing imperfect market structures is as follows: P > MC.
The existence of public goods Public goods often benefit more than one consumer. Because nobody can be excluded from using public goods, many times consumers do not pay for the use of these goods. This usually results in an inefficient supply of production. The formula representing the existence of public goods is as follows: P <>MC.
The presence of external costs and benefits Externalities exist when a cost or benefit is imposed on parties outside the transaction (other than the supplier and the consumer.) This usually results in an inefficient supply of production as well. The formula representing externalities is as follows: P <>MC.
Imperfect information Lack of complete information regarding a product. It is not often that you can make a good choice without all of the pertinent information. This lack of knowledge results in poor choices being made and a misallocation of resources. The formula representing imperfect information is as follows: P <>MC.
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