One way a government can eliminate a market failure

Question

Quizplus · Accepted Answer

The government can eliminate a market failure by regulating the price so that it equals marginal cost. This will ensure that the price reflects the true cost of production, which will encourage efficient resource allocation and eliminate any distortions caused by externalities or market power. A price floor equal to marginal cost (option B) may create a surplus of goods that cannot be sold, while regulating the price below average cost (option C) would be unsustainable for producers and likely result in exit from the market.

One Way a Government Can Eliminate a Market Failure