Market failure implies that the market mechanism

Question

Quizplus · Accepted Answer

Market failure occurs when the market mechanism fails to allocate resources efficiently, leading to a suboptimal level of output. This can result in the wrong mix of output, such as overproduction of goods with negative externalities (e.g. pollution) and underproduction of goods with positive externalities (e.g. education). Option A is incorrect as it refers to a situation where the economy is operating outside its production possibilities curve, which is not necessarily a market failure. Option C is also incorrect as it describes a consequence of market disequilibrium, not market failure per se. Option D is not a valid answer as it refers to a different concept altogether.

Market Failure Implies That the Market Mechanism