Figure: Market Failure (Figure: Market Failure) In the figure Market Failure, if production in this competitive market is at quantity G, then:
A)marginal benefit is less than marginal cost.
B)marginal benefit is equal to marginal cost.
C)marginal benefit is greater than marginal cost.
D)price is equal to marginal cost and less than marginal benefit.

Question

Figure: Market Failure   (Figure: Market Failure) In the figure Market Failure, if production in this competitive market is at quantity G, then:
A)marginal benefit is less than marginal cost. 
B)marginal benefit is equal to marginal cost. 
C)marginal benefit is greater than marginal cost. 
D)price is equal to marginal cost and less than marginal benefit.

Quizplus · Accepted Answer

At quantity G, the marginal cost (MC) is equal to the marginal revenue (MR) which is also equal to the market price. However, the marginal benefit (MB) is greater than the market price. This indicates that the consumers value the good more than what they have to pay for it. Therefore, the market is producing an output level below the socially optimal level where MB=MC. Hence, there is a market failure and the correct answer is A- marginal benefit is less than marginal cost.

Figure: Market Failure (Figure: Market Failure) in the Figure