Achieving efficient allocation of scarce resources in a free market
1. Understand why P* and Q* is allocated efficiently
2. Build a model with supply, demand, private costs, social costs, private benefits, social benefits
3. Prove that at equilibrium, 3 things occur: 1) Maximisation of social surplus 2) Maximisation of net social benefit 3) Perfect allocation of resources to follow consumer demand
Assumptions for free market equilibrium to be efficient
Many buyers and sellers
Perfect information for consumers and producers
No barriers to entry or exit
Firms are profit maximisers
Consumers are utility maximisers
If assumptions are violated

There may be a difference between the private optimum (where MPC=MPB) and the social optimum (where MSC=MSB), leading to market failure
Differences between private optimum and social optimum is where market failures can come from
