Final answer:
Signs of market failure include overallocation and underallocation of resources, and negative externalities. Inadequate competition, lack of information, and immobility of resources are wider conditions contributing to market failure, particularly when the market does not provide public goods or account for social costs.
Step-by-step explanation:
Signs of a market failure include overallocation of resources, underallocation of resources, and negative externalities. Falling prices and high demand for goods do not inherently indicate market failure. Instead, overallocation might occur when too many resources are used, leading to waste or environmental harm, while underallocation happens when not enough resources are devoted to a service that the public needs. Negative externalities, such as pollution, are a classic example of market failures, as the costs of these are not reflected in the prices of goods or services and can harm third parties.
Universal generalizations that lead to market failure include inadequate competition, lack of information, and immobility of resources. Lack of competition can lead to monopoly power or imperfect competition, while inadequate information can prevent consumers and producers from making informed decisions. Immobility of resources means that factors of production such as land, labor, capital, and entrepreneurs cannot move freely to where they are most needed, leading to inefficient resource allocation.
Finally, the free market might not provide public goods adequately, since these are non-excludable and non-rivalrous, meaning that private firms have little incentive to produce them as they cannot easily charge people for use. When markets fail to account for social costs and benefits, a market failure is recognized by economists.