Question

Which of the following represents a market failure?

a. Shopping for used cars when the seller has private information about the car unavailable to the buyer
b. Shopping for breakfast cereal and comparing nutritional labels
c. Deciding which firm's stock to purchase by looking at their publicly disclosed financial statements
d. None of the above

Answer 1

a. Shopping for used cars when the seller has private information about the car unavailable to the buyer

Step-by-step explanation:

When the market is not able to produce an efficient quantity, then it is said that market is failed. This might happens due to many reasons and asymmetric information is one of them. When there is an asymmetric information, then the sellers of the used car have information about it, but the buyer do not have the full information about the used car.

Hence this leads to inefficient outcome and therefore market fails.

Hence it can be said that a market failure example is Shopping for used cars when the seller has private information about the car unavailable to the buyer.

Hence option first is the correct answer.