Is the external marginal cost added to the supply curve or subtracted? a) it is subtracted from the supply curve, which shifts the supply curve outwards and to the right b) it is added to the supply curve which shifts the supply curve upwards and to the left.    Note- the externaility this problem is referring to is a NEGATIVE externality

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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.