Why markets generally fail to achieve social efficiency Essay

Why markets generally fail to achieve social efficiency - Essay Example On the other hand, if the marginal cost to society exceeds the marginal benefit, then the social efficiency is low in that case. Whereas, when MSC and MSB are equal, it is referred to be at an optimum level (Suneja, pp.147, 2000). It is very difficult to achieve social efficiency and real markets fail to accomplish it because their marginal social costs do not equal the marginal social benefits. There are a number of reasons behind market failure. Externalities: â€Å"A market is not likely to lead to market efficiency if the deeds of the producers or consumers affect people other than themselves† (Sloman & Sutcliffe, pp.430, 2004). Externalities occur when society fails to make adequate compensation for the production of goods and services as well as for the consumption of these products. This is attributable to the ‘spillover effect’ this leads. Since the pricing system does not account for the marginal social costs and benefits that are attached to the compensa tion of these products, externalities exist, which may often lead to market failure. Social cost is the addition of private cost and the externalities. Let us take an example of a chemical industry. If a chemical industry release by products into a river or atmosphere, it is creating negative externalities that