Market imperfections are often brought about by externalities. If there are external benefits or positive externalities associated with consumption and production of a particular product in Canada, it can be said that the: Multiple Choice government should consider placing a special tax on producers. supply curve for the product lies too far to the right to provide an efficient allocation of resources. demand curve understates the total benefit from the product and resources are under-allocated to its production. government should consider prohibiting the production of the commodity.

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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.