Question

Under which of the following conditions are markets likely to fail?

a) Property rights are not well defined
b) Prices donâ t act as accurate economic signals
c) Both a) and b) are true
d) Neither a) nor b) is true

Answer 1

Markets are likely to experience failure when property rights are not well defined and prices do not serve as accurate economic indicators; therefore, both of those conditions can result in market failure.

Step-by-step explanation:

Markets are likely to fail under certain conditions, including when property rights are not well defined and when prices do not act as accurate economic signals. Both of these scenarios can distort the efficient allocation of resources in the market. Specifically:

• When property rights are unclear or unenforced, it can lead to overuse or misuse of resources, since no one has a clear incentive to preserve or optimally use the resource.
• Prices that do not reflect the true economic cost of a good or service can lead to overconsumption or underproduction of that good or service, as they won't include external costs or benefits to society.

Therefore, the correct answer to the question would be c) Both a) and b) are true, as both poorly defined property rights and inaccurate price signals can lead to situations where the market fails to allocate resources efficiently.