Consumer surplus is the difference between a consumer's willingness to pay and the price they actually pay for a good or service. For example, if I am willing to pay $10 for good but only pay $5, there is an additional (or surplus) $5 benefit to society. On a market diagram, this is the area above the price, but below the demand curve. Producer surplus is the difference between what the producer is willing to sell the good or service for and what they actually sell it for. For example, if I was willing to sell the good for $5, but I sell it for $10, there is a $5 surplus benefit to society. On a market diagram, producer surplus is the area below the price but above the supply curve.

When you add consumer and producer surplus together, you get the total welfare to the society. This welfare is maximized at the equilibrium point, which makes the equilibrium allocatively efficient. Market efficiency is achieved when resource allocation maximizes the overall surplus, that is, consumer surplus and producer surplus.

Market failure takes place when the market does not produce in an economically efficient outcome; that is, overall benefits are not maximized. In the presence of market failure, the price mechanism does not generate socially optimal quantity.