Question

What flaws in a market system lead to market failures?

A) Lack of Competition
B) Externalities
C) Perfect Information
D) Rational Decision Making

Answer 1

Market failures in a market system can occur due to lack of competition, externalities, and rational decision making.

Step-by-step explanation:

In a market system, several flaws can lead to market failures:

1. Lack of Competition: When there is a lack of competition, monopolies or oligopolies can form, leading to higher prices, reduced quality, and limited choices for consumers. This undermines the efficiency and effectiveness of the market.
2. Externalities: Externalities occur when the actions of buyers or sellers have unintended effects on third parties. For example, pollution caused by a factory can harm the environment and public health, leading to a market failure.
3. Rational Decision Making: While rational decision making is generally beneficial, it can lead to market failures when individuals do not take into account the full costs and benefits of their actions. This can result in overconsumption or underinvestment in certain goods or services, leading to inefficiencies in the market.