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Market Failure With De-Merit Goods This graph shows why the free market system fails when it allocates resources to industries which product de-merit goods. The three lines on the graph all stand for different things and by looking at all of them together we can see why the market fails to provide these goods. To put the graph in context let us say that this graph shows the benefit and cost curves for chemicals that are harmful to the environment but useful to the individual. The red line on the curve shows the marginal benefit to the individual for every extra unit of the chemicals bought. This benefit is reflected in how much the people will be willing to pay for the good. (This is why the y-axis is labelled cost/benefit as one can be used as a synonym for the other.) This line is much like the demand curve on a...

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