A market failure likely occurs when
A) the consumption of a good generates an effect on third parties.
B) firm production lacks an externality on third parties.
C) consumers are sovereign but firms are not sovereign.
D) there is no much competition in a market.

Question

Quizplus · Accepted Answer

Market failure occurs when the market is unable to allocate resources efficiently due to the presence of externalities, such as when the consumption of a good generates an effect on third parties. Option B is incorrect because the presence of externalities on third parties is necessary for market failure to occur. Option C is incorrect because both consumers and firms can influence market outcomes. Option D is also incorrect because lack of competition alone may not necessarily result in market failure.

A Market Failure Likely Occurs When