If market signals result in pollution beyond the optimal level, then
A) The economy experiences government failure.
B) A laissez faire approach will reduce the level of pollution.
C) The market mechanism has failed to achieve social efficiency.
D) The government is allocating resources inefficiently.

Question

Quizplus · Accepted Answer

Market failure occurs when the market mechanism fails to achieve social efficiency, i.e., resources are not allocated in the most efficient way. In this case, market signals have resulted in pollution beyond the optimal level, indicating that the market has failed to account for the negative externality (pollution) of production or consumption activities. Therefore, a corrective measure, such as a government intervention, is required to internalize the externality and achieve social efficiency. Option A and D are incorrect, as they attribute the failure to government rather than market mechanism, and imply that government intervention is already in place but ineffective. Option B is incorrect because a laissez-faire approach will not internalize the externality and therefore will not reduce the level of pollution beyond the optimal level.

If Market Signals Result in Pollution Beyond the Optimal Level