Market failure can occur even when the price signals are accurate.

Question

Quizplus · Accepted Answer

Market failure can occur due to various reasons such as externalities, public goods, imperfect competition, and asymmetric information. Even if the price signals are accurately reflecting the market demand and supply, the market may still fail to allocate resources efficiently. For example, a firm may produce goods with negative externalities (such as pollution) and the price signals may not reflect the full cost of production, leading to a misallocation of resources.

Market Failure Can Occur Even When the Price Signals Are