Which type of the market failure exists when the effect of one party's economic activities on another party is not taken into account by the price system?
A)Imperfect information
B)Externalities
C)Public goods
D)Imperfect competition

Question

Quizplus · Accepted Answer

Externalities occur when the actions of one party have an impact on another party that is not reflected in market prices. This leads to a market failure where the optimal level of output is not achieved. Examples of externalities include pollution, congestion, and noise. Imperfect information relates to situations where participants in the market lack information, resulting in adverse selection, moral hazard, and market failure. Public goods are non-rivalrous and non-excludable, leading to underproduction in the market. Imperfect competition occurs when there are barriers to entry or when a limited number of firms dominate the market, leading to higher prices and lower output.

Which Type of the Market Failure Exists When the Effect