Which of the following can result in a market producing an inefficient quantity of a good? i. Competition
Ii) An external cost or an external benefit
Iii) A tax
A) ii only
B) ii and iii
C) iii only
D) i and iii
E) i only

Question

Quizplus · Accepted Answer

External costs or benefits (ii) can lead to a market producing an inefficient quantity of a good by creating a difference between private and social costs or benefits. This results in market failure where the price and quantity produced do not reflect the true costs or benefits to society. A tax (iii) can also lead to an inefficient quantity by increasing the cost of production and reducing the quantity supplied. Competition (i) on the other hand, promotes efficiency by forcing firms to produce at the lowest cost and sell at the lowest possible price. Therefore, option D which includes competition and tax as incorrect answers. Option E which includes only competition is also incorrect as external costs or benefits can also lead to market inefficiencies.

Which of the Following Can Result in a Market Producing