Market failure occurs when

Question

Quizplus · Accepted Answer

Market failure occurs when some Pareto improvements are not made, meaning that there are potential gains from trade that are not being realized in the market. This can be due to a variety of reasons, such as externalities, public goods, market power, and asymmetric information. Market failure leads to an inefficient allocation of resources and a potential loss of social welfare. A and B are incorrect because they refer to the concept of Pareto efficiency and do not necessarily address market failure. C is incorrect because operating above the production possibilities frontier is not necessarily a sign of market failure, but could be due to technological advancements or trade. D is incorrect because perfect competition does not necessarily guarantee market efficiency or the absence of market failure.

Market Failure Occurs When