A market failure is a situation in which

Question

Quizplus · Accepted Answer

A market failure occurs when the market equilibrium does not result in an efficient allocation of resources. This can happen when some externalities are not accounted for, such as pollution, or when there is not enough competition in the market. In such a case, the market ends up producing either too much or too little of the good or service, leading to inefficiencies. The government may need to intervene to correct the market failure, but not necessarily in every case. Option A is incorrect because if resources are being efficiently allocated, there should be no need for companies to shut down. Option C is partially correct but incomplete as the government does not always need to act. Option D is incorrect as free entry or exit is important for competition, but it is not a prerequisite for identifying market failure.

A Market Failure Is a Situation in Which