Draw a graph that models a positive externality in consumption (label and clearly explain graph) Explain:  i) The difference between the competitive equilibrium quantity and the socially optimal level quantity. ii) A possible intervention to bring the competitive equilibrium quantity closer to the socially optimal quantity. iii) An example of a setting in which this type of externality might occur (explain clearly how/why this externality happens).

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Market Failure Analysis

To understand Market failure, we need to first understand welfare economics. An Italian economist, Vilfredo Pareto stated that allocation of resources in an efficient manner such that an economic change, which harms no one and makes someone better off, indicates an increase in social welfare. It is also called Pareto Optimality, where resources cannot further be reallocated without harming one. This does not apply to those economic changes, which harm some and benefit others. social welfare increases if the utility of any of its members' increases and none decrease in the economy.