Market Failure

Market Failure: The failure of the free market to achieve allocative efficiency, where too
much or too little of a good or service is consumed and produced relative to the socially
optimal level where social surplus is maximized. Allocative inefficiency: The failure to
allocate resources into the production of goods and services that maximizes social surplus,
such that MSB w MSC.

Sources of Market Failure (Summary)

1. Externalities: The failure to take into account the positive/negative impact on third
parties during consumption and production, resulting in over/under allocation of
resources.
a. Negative externalities in production
b. Negative externalities in consumption & Demerit Goods
c. Positive externalities in production
d. Positive externalities in consumption & Merit Goods
2. Public Goods: The failure of the free market to provide essential goods that are
non-rival and non-excludable.
3. Common Access Resources: The overuse of common access resources that are
rivalrous and non-excludable to produce goods & services.

Solutions to Market Failure (Summary)

-ve Ext. +ve Ext +ve Ext. -ve Ext. Public Common
in pdtn in pdtn in con/ in con/ Goods Access
Merit Demerit Resources
Goods Goods
Taxes X X
Subsidies X X

Legislation X X X
Advertising X X
Direct X X X
Govt.
Provision
Carbon X X
Taxes
Tradable X X
Permits
 Externalities
Externalities: The positive or negative side effects on third parties from the consumption
or production of goods and services
Marginal Private Benefit（MPB）: Extra benefit to consumers from the consumption of
one more unit of good/service.
Marginal Private Cost（MPC）: Extra cost to producers from the production of one
more unit of good/service.
Marginal Social Benefit （MSB）: Extra benefit to society from the consumption of one
more unit of good/service.
Marginal Social Cost（MSC）: Extra cost to society from the production of one more
unit of good/service.
Marginal External Benefit（MEB）: Extra benefit to third parties from the consumption
of one more unit of good/service.
Marginal External Cost（MEC）: Extra cost to third parties from the consumption of
one more unit of good/service.
Deadweight Loss: Welfare loss to society as measured by the loss of producer and
consumer surplus.

In the absence of externalities, the free-

market equilibrium is allocatively efficient
and social surplus （sum of consumer and
producer surplus） is maximized.

Allocative efficiency is achieved at Qo as

MSB = MSC.

When externalities are present, MSC 。

MPC or MSB w MPB, such that MSC 丰
MSB in the free market equilibrium,
resulting in allocative inefficiency and
deadweight losses.
 Negative Externalities in Production

L Free Market Equilibrium: MPB = MPC;

consumers and producers only consider
private costs and benefits.
2. Socially Optimal Equilibrium: MSB =
MSC; allocatively efficient allocation of
resources, maximizes social surplus.
3. Divergence: Due to the presence of MEC,
MSC > MPC.
4. Market Failure: Qm > Qopt due to
MEC, resulting in market failure and
deadweight loss due to overallocation of
resources.

Solutions to Negative Externalities in Production

L Government Regulotions - The government can outlaw pollutive practices or

force firms to take remedial action,
ideally shifting MPC leftwards (reduce
supply) until MSC = MPC such that Qm
= Qopt, eliminating the deadweight loss
and restoring allocative efficiency.

2. Morket Besed Solutions: Indirect Taxes -

The government can impose an indirect
tax per unit of output equivalent to the
Impact of Indirect Taxes
external cost, raising cost of production
and shifting the MPC leftwards (reduce
supply) until MSC = MPC such that Qm
= Qopt, eliminating the deadweight loss
and restoring allocative efficiency.
 Impact of Carbon Taxes 3. Morket Based Solutions: Carbon Tax -
Alternatively, the government can
impose an indirect tax per unit of

extern。 Iity, such as on the amount

of carbon emissions. In the short run, the
impact is similar to an indirect tax on
output, shifting MPC leftwards until
MSC = MPC such that Qm = Qopt,
eliminating the deadweight loss and
restoring allocative efficiency. In the
long run, firms are incentivized to adopt
less pollutive methods of production to
avoid the taxes, reducing the MEC and
shifting the MSC downwards until
MSC2, increasing the socially optimal
level of output and lowering the price.

4. Morket Besed Solutions: Tradable

Tradeable Permits
Permits - The government issues
pollution permits to firms who are then
allowed to freely buy and sell these
permits amongst themselves. The impact
of tradable permits is similar to that of
carbon taxes in both the short and long
run (see carbon tax explanation above).
Evaluation of Solutions

Market-Based Solutions Government Intervention

+ 1. Simple to implement.
1. Internalizing the externality;
2. The government has the
consumers and producers will
authority to compel firms to
consider the external cost as
comply with regulations.
they are forced to pay higher
prices and incur higher costs.
2. Taxes on emissions are
superior to taxes on output as
they create an incentive to
reduce externalities in the long
run.
3. Taxation generally leads to
lower pollution levels at lower
costs.

L It is difficult to estimate the 1. No market-based incentives

value of tax required to be
equivalent to the monetary
harm of the externality, and
the necessary amount of
permits required to fully
internalize the externality.
2. Permits might not be
distributed fairly amongst
firms due to lobbying and
favoritism.
3. Too many permits could
undermine the effectiveness of
a tradable permit system as
pollution costs would be low.
and no internalization of the
externalities; does not
distinguish between highly
pollutive firms and less
pollutive ones.
2. Imperfect information;
difficult to target Qopt
effectively.
3. Enforcement costs and
imperfections.
Negative Externalities in Consumption

Negative Externalities in Consumption L Free Market Equilibrium: MPB = MPC;

consumers and producers only consider
private costs and benefits.
2. Socially Optimal Equilibrium: MSB =
MSC; allocatively efficient allocation of
resources, maximizes social surplus.
3. Divergence: Due to the presence of
MEC, MPB > MSB.
4. Market Failure: Qm > Qopt due to
MEC, resulting in market failure and
deadweight loss due to overallocation of
resources.

Demerit Goods: Deemed to be bad by the government but overconsumed by consumers.

- Generates negative externalities in consumption (not production).
- Could also be overconsumed due to ignorance or indifference towards the harmful
effects on the consumer, resulting in a higher demand and consumption beyond
what is socially optimal.
Note: Goods can generate negative externalities without being regarded as demerit
goods. Do not use demerit goods & negative externalities interchangeably.

Solutions to Negative Externalities in Consumption & Demerit Goods

L Government Regulation - The

government can restrict consumers from
consuming harmful goods, ideally shifting
MPB leftwards (reduce demand) until MSB
= MPB such that Qm = Qopt, eliminating
the deadweight loss and restoring allocative
efficiency. This also corrects the
overconsumption of demerit goods.
Impact of Advertising!
2. Advertising - The government can
influence the tastes and preferences of
consumers, convincing them to reduce
their demand for harmful goods by
emphasizing the negative impacts thot
consumption would hove on them,

ideally shi代 ing MPB leftwards

(reduce demand) until MSB = MPB
such that Qm = Qopt, eliminating the
deadweight loss and restoring allocative
efficiency. This also corrects the
overconsumption of demerit goods.

3. Morket Besed Solutions: Indirect

Impact of Indirect Taxes
Taxes - The government can impose an
indirect tax per unit on output equivalent to
the external cost, raising cost of production
and shifting the MPC leftwards (reduce
supply) until MPC + Tax = MPB such that
Qm = Qopt, eliminating the deadweight loss
and restoring allocative efficiency. Note:
demand does not shift! This can also correct
the overconsumption of demerit goods.
4. Nudges - Similar to education and
campaigns, nudges seek to subtly
influence consumer behaviors, changing
their tastes and preferences and lowering

demand for the good（MPB shi 代 s

left）, through methods such as
mandating the placement of unhealthy
foods in less prominent places in
supermarkets, and mandating health
warning labels on harmful goods such as
alcohol and cigarettes
Evaluation of Solutions

+ - Indirect Taxes: Creates incentives for consumers to change

consumption patterns, internalize the externalities.
- Advertising & Nudges: Easy to implement.
- Government Regulation: Can be effective in reducing consumption of
certain goods such as cigarettes.

-Indirect Taxes:
o Difficult to estimate the true cost of externality and the
corresponding size of tax required.
o Many goods that generate negative externalities have an inelastic
demand. The fall in consumption from taxes might be
insufficient to reduce the overconsumption and could require a
large tax.
- Advertising & Nudges:
o Opportunity costs incurred in having to finance advertisement
campaigns.
o Difficult to effectively influence consumer preferences to reduce
demand and reduce externalities.
-Government Regulation
o Difficult to regulate the consumption of some goods such as
petrol
 Positive Externalities in Production
Positive Externalities in Production
0 Qm Qopt
Solutions to Positive Externalities in Production
L Direct Government Provision: The government can directly provide education and
Impact of Subsidies
L Free Market Equilibrium: MPB = MPC;
consumers and producers only consider
private costs and benefits.
2. Socially Optimal Equilibrium: MSB =
MSC; allocatively efficient allocation
of resources, maximizes social surplus.
3. Divergence: Due to the presence of
MEBZ MSC < MPC.
4. Market Failure: Qm < Qopt due to
MEB, resulting in market failure and
deadweight loss due to underallocation of
Quantity resources.
training to workers or fund Research &
Development (R&D)using tax revenue,
increasing the supply and shifting MPC
rightwards until MSC = MPC, such that
Qm = Qopt, eliminating the deadweight
loss and restoring allocative efficiency.
2. Subsidies: The government can impose
a subsidy per unit on output equivalent
to the external benefit, lowering cost of
production and shifting the MPC
rightwards (increase supply) until MSC
= MPC such that Qm = Qopt,
eliminating the deadweight loss and
restoring allocative efficiency.
Evaluation of Solutions
+ - Subsidies and Government Provision are effective in increasing the
quantity of the good consumed and produced. It also has the added
benefit of lowering price.

- Subsidies and Government Provision

o Difficult to estimate the true cost of externality and the
corresponding size of subsidy/provision required.
o Opportunity cost incurred in financing the subsidy or government
provision, which could force the government to give up
spending in other areas.
o Susceptible to political influence and lobbying. Additionally；
the goods subsidized/provided for might not be in societ/s best
interest.
Positive Externalities in Consumption

L Free Market Equilibrium: MPB = MPC;

consumers and producers only
consider private costs and benefits.
2. Socially Optimal Equilibrium: MSB =
MSC; allocatively efficient allocation
of resources, maximizes social surplus.
3. Divergence: Due to the presence of
MEBZ MPB < MSB.
4. Market Failure: Qm > Qopt due
to MEB, resulting in market failure and
deadweight loss due to underallocation of
resources.

Merit Goods: Deemed to be good by the government, but underconsumed by

consumers.
- Generates positive externalities in consumption (not production).
- Could also be underconsumed due to ignorance of the actual benefits to the
consumer, resulting in lower demand than socially optimal.
- Could also be underconsumed due to income inequality, with low- income
groups being willing yet unable to consume these goods, resulting in lower
demand than socially optimal.
Note: Goods can generate positive externalities without being regarded as merit
goods. Do not use merit goods & positive externalities interchangeably.

Solutions to Positive Externalities in Consumption & Merit Goods

Epact of Government Reaulation I Legislation - The government can
make the consumption of certain
Pri
ce($

goods compulsory, such as

DHL MSC = MPC education or vaccination, ideally
opt
P
shifting MPB rightwards (increase
demand) until MSB = MPB such
*
=Pn,'
MSB = MPB with Government
P Regulation that Qm = Qopt, eliminating the
MPB deadweight loss and restoring
allocative efficiency. This also
0 Qm Qopt Quantity
= Qm'
 corrects the underconsumption of merit
goods.

Impact of Advertising 2. Advertising - The government can

influence the tastes and preferences of
consumers, convincing them to
increase their demand for beneficial
goods by emphasizing the positive
impacts that consumption would have
on them, ideally shifting MPB
rightwards (increase demand) until
MSB = MPB such that Qm = Qopt,
eliminating the deadweight loss and
restoring allocative efficiency. This
also corrects the underconsumption of
merit goods.

3. Direct Government Provision - The

government can supplement private
sector provision by increasing supply
directly (e.g. public hospitals, schools),
ideally shifting MPC rightwards such
that Qm = Qopt, eliminating the
deadweight loss and restoring
allocative efficiency. This also corrects
the underconsumption of merit goods.
 Impact of Subsidies
4.
Subsidies - The government can impose a
subsidy per unit on output equivalent to
the external benefit, lowering cost of
production and shifting the MPC
rightwards (increase supply) such that
Qm = Qopt, eliminating the
deadweight loss and restoring
allocative efficiency.

5.
Nudges - Similar to education and
campaigns, nudges seek to subtly influence
consumer behaviors, changing their tastes
and preferences and raising demand for the

good(MPB shi 代 s right), through

measures such as mandating the placement
of healthy foods in more prominent places
in supermarkets, and highlighting exercise
corners & parks on neighborhood information boards
Evaluation of Solutions

+ - Subsidies and Government Provision are effective in increasing the

quantity of the good consumed and produced. It also has the added
benefit of lowering price.
- Advertising, nudges and legislation could be very effective in some
cases where it is easier to influence consumers or compel consumers to
consume certain types of goods or services.

- Subsidies and Government Provision

o Difficult to estimate the true cost of externality and the
corresponding size of subsidy/provision required.
o Opportunity cost incurred in financing the subsidy or government
provision, which could force the government to give up
spending in other areas.
o Susceptible to political influence and lobbying. Additionally, the
goods subsidized/provided for might not be in society's best
interest.
- Advertising, Nudges and Legislation
o Difficult to estimate the true cost of externality and the extent that
advertisement/nudges/legislation that is required.
o Raises the price of the good that could make it even more
unaffordable for lower income groups.
Public Goods
Public Goods: Goods that are non-rivalrous and non-excludable in consumption, and
are not provided for by the free market, resulting in complete market failure.
Non-rival: Consumption by one person does not reduce the consumption by another.
Non-excludable: Impossible to exclude non-payers from enjoying the good or service.

Public goods result in complete market failure due to the free-rider problem
- Due to non-excludability, consumers have no incentive to pay for the good to
be provided, and firms do not have the ability to charge for the good.
- Since an infinite number of consumers can theoretically enjoy the good for free
due to non-rivalry, firms do not have an incentive to provide the good as they
cannot profit from it once it is provided for.
- This results in complete market failure as the free market does not provide the
public good at all, resulting in deadweight loss and allocative inefficiency.

Evaluating the Direct Provision of Public Goods

Direct Government Provision

- The failure of the free market to provide public goods, requires the government
to take on the provision of these goods.
- The government can directly finance the provision of public goods using tax
revenues, targeting the socially optimal level of output where MSB = MSC and
providing the good to society for free.
- Ideally this should restore allocative efficiency and eliminate any deadweight
loss in the market.

Limitations
-It is difficult to estimate the socially optimal amount of the public good to be
provided, particularly since there is no market demand for the good (consumers
might be able yet unwilling to pay, due to the free rider problem).

- The opportunity cost involved in funding public goods requires the government
to forgo spending in other areas, and to choose between what public goods to
provide.

Contracting out to the Private Sector

- The government could contract out the provision of the public good to the
 private sector, by paying private firms to produce the good, for example to
build a dam or a tsunami warning system
- The profit motive of private sector firms could ensure a higher degree of
efficiency than the government who lacks the profit motive to be cost efficient
- The profit motive of private sector firms would also motivate them to produce
goods of a higher quality

Limitations
- It could be costlier than if the government produced the good themselves.
Direct provision by the government would only incur costs of the factors of
production, while contracting out to the private firm would involve paying a
higher price due to the desire of private firms to earn a profit
- The profit motive of private sector firms could lead to them cutting corners and
compromising on quality to be cost efficient
- The cost of monitoring and managing private firms could lead to higher costs
than under direct provision
Common Access Resources
Common Access Resources: Rivalrous but non-excludable; owned by no one but free
for all to use.
Sustainability: Normally refers to environmental sustainability； where the
consumption of resources today does not threaten the ability to produce goods and
services in the future.
Market Failure from Common Access Resources Common Access Resources result in
market failure due to negative externalities
that threaten sustainability and the ability
of economies to produce goods and
services in the future. Thus, Common
Access Resources are overutilized in the
production of goods and services, resulting
in market failure from the overallocation of
resources towards the production of goods
and services.

Tragedy of the Commons

• The selfish pursuit of individual utility leading to an inefficient outcome for
society, resulting in a loss of society's welfare
• Individuals are incentivized to overconsume common access resources due to its
non-rivalrous nature, but this leads to unsustainable outcomes due to the
depletion of common access resources (the "trogedy")
• The marginal external cost(MEC)thus represents the overuse of these resources
in the production of certain goods and services e.g. pollution "uses" up clean air,
overgrazing of cattle to produce meat depletes agricultural land, overfishing to
produce fish for consumption depletes fish stocks etc.
Solutions to Common Access Resources
Inwact of Government Reaulation
Impact of Carbon Taxes
Tradeable Permits
Price($)
1. Legislotion - Legislation can come
in the form of restrictions on
certain type of emissions and
pollutive activities or mandating
the licensing of certain activities.
Legislation restricts supply and
lowers the production of goods and
services to reduce the production
and improve allocative efficiency.
2. Corbcn Toxes 一 Higher tax
rates are applied to more pollutive
pollutants, raising costs and
lowering supply in the short run,
while incentivizing firms to switch
to less pollutive methods of
production in the long run.
3. Tradable Permits - The
government issues pollution permits to
firms who are then allowed to freely
buy and sell these permits amongst
themselves. The impact of tradable
permits is similar to that of carbon
taxes in both the short and long run;
raising cost of production to
discourage supply in the short run and
incentivizing the switch to less
 pollutive methods of production
in the long run.

Evaluating Carbon Taxes and Tradable Permits

Carbon Taxes can be superior to Tradable Permits
- Energy prices are more predictable with a fixed tax/unit of emissions than the
fluctuating pollution costs from permits.
- Carbon taxes are easier to design and implement.
- Carbon taxes may be applied to all users of fossil fuels; tradable permits are often
industry specific.
- Carbon taxes are not susceptible to manipulation; tradable permits can be
selectively given to companies with vested interests.
- Carbon taxes incur less enforcement costs.
- Carbon taxes cannot be manipulated to become a barrier to entry, while tradable
permits can be stockpiled to prevent rivals from obtaining them.

Tradable Permits can be superior to Carbon Taxes

- Carbon taxes may be set too low, since they are arbitrarily determined by the
government as opposed to the price of tradable permits being determined by
market forces.
- Carbon taxes cannot target a certain level of carbon reduction, unlike the
emission "cop" under tradable permits.
- Carbon taxes are regressive and could worsen income distribution.
- Carbon taxes must be adjusted for inflation or lose its effectiveness, while
tradable permits automatically rise in price when demand rises.

Alternative Solution for Pollution: Funding Clean Technologies

1. Collective Self-Governance: communities develop complex rules and mechanisms

to prevent the overutilization of common access resources (refuting the Tragedy
of the Commons). Success is heavily dependent on good methods of
communication between members of the community.

Advantages Disadvantages
1. Consumers are not necessarily 1. The failure to communicate
selfish, and efficient allocation effectively within the
of resources can be achieved
 without government intervention
despite the nonexcludable nature
of common pool resources
community would limit the ability
to self-regulate
2. The lack of definable boundaries
(e.g. oceans) make it difficult for
self-governance

2. Education & Campaigns: influence the tastes and preferences of consumers to

lower their demand for goods that contribute to the overutilization of common
access resources, discouraging firms from engaging in environmentally
unsustainable practices

Advantages
1. Market-based solution, restores
allocative efficiency without the
need for government
intervention
Disadvantages
- It could be difficult to bring about
a significant and longterm
reduction in demand, as
consumers might not care
sufficiently about sustainability,
particularly about those issues
that are more global and broader
in nature

3. International Agreements: the international nature of some sustainability issues

(e.g. global warming) require global coordination between governments
CL 1987 Montreal Protocol: phasing out of substances that deplete the ozone
layer
b. 2005 EU Emissions Trading System(EU ETS): tradable permit system
governing energy and industrial companies
c. 2005 Kyoto Protocol: commitment to reduce emissions of carbon dioxide
and other greenhouse gases
d. 2016 Paris Agreement: strengthen international cooperation to tackle
climate change, limiting temperature increase to 1.5%

Asymmetric Information
Asymmetric Information: When buyers and sellers do not have equal access to
information, resulting in an underallocation of resources to the production of goods and
services.

Adverse Selection: When one party has more information than another and the less
informed party inadvertently engages in undesirable transactions.
When Buyers have more Information than Sellers:
• In insurance, sellers are unaware of the buyers' true health condition and so could
inadvertently sell insurance to more consumers with underlying health conditions
than they would like, resulting in high costs from insurance claims. This results in
an underallocation of resources as insurers are less willing to sell insurance since
the cost of such insurance claims are likely to be very high.

Solutions
• Insurance products of varying prices: Insurance companies incentivize healthier
consumers to buy lower cost products with lower protection and consumers with
illnesses to buy higher cost products with higher protection.
o Limitations: (1) Consumers could be forced to choose policies based on
income level rather than health status(2)Consumers who need health
insurance could fail to get covered as insurers do not want to insure high
risk groups like the elderly
• Direct Provision of henlthccire: The government can mitigate the unwillingness of
health insurers to cover certain consumer groups or the inability to afford higher
coverage despite health issues by directly providing healthcare, effectively
covering all consumers.
o Limitations: (1) Burden on government budget

When Sellers have more information than Buyers:

• Sellers of second-hand cars (sellers are more aware of defects), sellers of
medication and drugs (sellers are more aware of side-effects and health hazards)
and sellers of healthcare/legal services.

• Overallocation arises due to excessively high demand when consumers are

unaware of the problems. Underallocation arises due to excessively low demand
when consumers are fearful of potential problems. Both cases lead to a
misallocation of resources and deadweight losses.

Government solutions
• Regulotion: Health and safety regulation to ensure the minimum quality of goods
and services sold.
o Limitations: (1) Time consuming and bureaucratic to pass
legislation(2)Opportunity cost involved in assessing and monitoring
products
 • Provision of Information: Governments can provide information to consumers or
compel producers to do so by law.
o Limitations: (1) Difficult to collect and disseminate all necessary
information(2)Difficult to ensure the accuracy and completeness of
information provided by the firm(3)Impossible to fully eliminate
informational asymmetry
• Licensure: Necessitate the licensing of practitioners (lawyers, doctors) and firms
to ensure minimum quality and safety standards.
o Limitation: (1) Restricts supply and result in higher prices for consumers

Moral Hazard: When one party has more information than the other and as a result, does
not have to bear the full consequences of the risks that they take.

When Buyers have more Information than Sellers:

• In insurance, buyers could be more careless in driving or less mindful of their
health since they are able to make claims for damages to their cars or falling ill.
This results in an underallocation of resources as insurers are less willing to sell
insurance since the cost of such insurance claims are likely to be very high.
• In finance, banks could be more careless in making loans and investments as they
believe that the government would protect them from bankruptcy in the event of
negative financial events (such as in the 2008 financial crisis). This results in an
overallocation of resources into providing banking and loan services as banks are
less careful about suffering losses.
Solutions
• Out-of-pocket peyments (insurance): Buyers are forced by insurance companies to
pay a fraction of any insurance claims, reducing their incentive to be reckless
since they have to bear a portion of the costs.
o Limitations: Higher degree of insurance protection comes with high out-of-
pocket payments (vice versa); high income groups are more able to afford
a higher degree of protection with higher out- of-pocket payments and are
more incentivized to alter behavior as opposed to low-income groups that
can only afford low protection with low out-of-pocket payments.
• Regulotionu (finonce/bcinking): Governments regulate business activities of
banks to prevent excessive risk-taking.
Equity in the Distribution of Income & Wealth
Why does the free-market economy result in income inequalities?
- Income is earned from labor, land, capital and entrepreneurship
- Labor income (wages) are determined by the forces of demand & supply; the
higher the demand relative to supply, the higher the income/wages
a. Not all workers who are able and willing to work can find a job
b. Not all workers have access to educational opportunities and healthcare
services that would allow them to be productive and earn high incomes
c. Some individuals with special talents or natural abilities that are in short
supply (athletes, actors, singers etc.) could earn extremely high incomes
- Unequal ownership of resources (land, capital & entrepreneurship) lead to
different levels of income earned from rent, interest and profits.

Why does the free-market economy result in wealth inequalities?

- Wealth refers to the assets accumulated by households, typically in the form of
cash, real estate, company stock & shares as well as bonds.
- High incomes allow individuals to save and invest these savings into assets that
can grow in value over time
- High income inequality could thus contribute to high wealth inequality over
time

Why does income and wealth inequality lead to market failure?

- Income and wealth inequality could contribute to the underconsumption of
merit goods as low-income groups do not have sufficient purchasing power to
consume these goods that are beneficial for them
- However, income and wealth inequality do not generate affect the efficiency of
resource allocation; it is possible to have high levels of income and wealth
inequality and yet still achieve allocative efficiency
- Nonetheless, income and wealth inequality could affect the equity objective of
resource allocation, as inequalities is inequitable, and the market would have
failed to allocate reosurces to produce goods and services in a fair and just
manner.