Question

Which of the following is an example of market failure?

A. A country is being invaded and occupied by a foreign enemy, but the private sector does not produce a bigenough mitary to stop theinvadens.
B. The price of a diamond is higher than the price of a bottle of water, even though diamonds area fuxury and water is essential to human life.
C. A professional basketball player is paid more than aschool teacher, even though school teachers arevital to the education of thildren.
D. Due to higher costs a hospital increases the prices that it charges for medical care during a pandemic.

Answer 1

Option A, regarding the private sector not producing a sufficient military for defense, is an example of a public good leading to market failure, as the private market may underprovide non-excludable and non-rivalrous goods.

Step-by-step explanation:

The question concerns examples of market failure, which occurs when a free market economy fails to allocate resources efficiently, leading to negative outcomes for society. Among the listed options, one example of market failure is clearly linked with the definition and description provided in the reference material.

In this context, public goods are a well-recognized form of market failure because they are often not supplied in sufficient quantities by the market due to their characteristics of non-excludability and non-rivalry. Given the information about externalities, such as pollution, where the private market fails to consider all social costs and benefits, we can identify the correct example of market failure.

Option A, which concerns a country's private sector not producing a large enough military to stop invaders, is an example of a public good that is not being sufficiently provided by the market. The defense provided by a military is non-excludable and non-rivalrous, which are characteristics of a public good leading to the free rider problem and market failure. Therefore, the correct option in the final answer is A.