Question

The term market failure refers to a. a situation in which the market on its own fails to allocate resources efficiently. b. an unsuccessful advertising campaign which reduces demand for a product. c. a situation in which competition among firms becomes ruthless. d. a firm that is forced out of business because of losses.

Answer 1

A) a situation in which the market on its own fails to allocate resources efficiently.

Step-by-step explanation:

A market failure happens when the total output of a good or service is less than or more than the socially optimal quantity.

In real life, a market is never able to achieve a socially optimal output, but coming close is generally good enough. When the price of a good or service is lower than the marginal social cost, then an over production and over consumption of the good will occur. On the other hand, when the price of a good or service is higher than the marginal social cost, then an under production and under consumption of the good will occur.

The greatest problems happen when there is an over provision of demerit goods, or private goods or services that are over consumed generating negative externalities.

The under production of merit goods is also a problem, since private goods that generate positive externalities aren't produced in enough quantities to satisfy the demand.

Marginal social cost = marginal private cost + marginal external costs (+ or -)

Answer 2

Answer: A. a situation in which the market on its own fails to allocate resources efficiently.

Explanation: A Market Failure is an economic situation in which the Market fails to allocate resources efficiently in a free market economy.

The market is a place where goods and services are exchange and if the management of the market is not well coordinated, it will lead to Market Failure.

There are different types of market failure which are:

1. Public goods

2. Market control

3. Externalities

4. Imperfect information.

There are also some causes of market failure and they are:

1. Power abuse (a monopoly)

2. A sole buyer of a factor of production

3. Improper or incomplete distribution of information

4. Externalities and public goods.