1)Market failure occurs when: a

1) Market failure occurs when:

• a. An imperfection in the market mechanism prevents an optimal outcome.

Market failure is a situation when production and distribution decisions takes place in inefficient manner. In other words, the allocation of resources could have been made in better ways, but because of various elements of market system (such as externalities, moral hazards, adverse selection), the resultant allocation in market system does not take place in best manner. Thus, it is an imperfection of market mechanism, causing prevention of optimal outcome.

2) The most desirable combination of output attainable with available resources, technology and social values is known as the:

• b. Optimal mix of output.

An outcome could be economically optimum but not socially. Such as in the cases of output where externalities are not considered. Another outcome could be desirable socially but not economically. However, there is outcome where not only the resources are allocated in best manner economically but also social efficiency is achieved, This outcome is known as optimal mix of output and it is most desirable.