Explain why the use of petrol and diesel cars may be a source of market failure.

Use of petrol and diesel cars causes over-pollution to the environment, which is an externality in the economy. The overconsumption of petrol and diesel cars results in more pollution and emissions than is socially optimal. Therefore the free market equilibrium does not sufficiently allocate resources, overproducing cars at a price below the social optimum. This causes a deadweight loss to society (show in diagram), resulting in lower living standards than would be if cars were produced at the social optimum. This is a market failure as it is an inefficient allocation of resources in society.