A free market fails when
A)there is government intervention.
B)there is an external effect in either production, consumption, or both.
C)firms that produce goods which create positive externalities go bankrupt.
D)firms that produce goods which create negative externalities earn high profits.

Question

Quizplus · Accepted Answer

A free market can fail when there are external effects, also known as externalities - costs or benefits that affect people who aren't involved in the transaction. For example, if a factory pollutes a river, the people who live downstream may suffer health problems. The factory isn't paying the cost of pollution, so it doesn't have an incentive to reduce its emissions. In this case, government intervention may be necessary to correct the market failure and ensure that the pollution is reduced to the level that benefits society as a whole.

A Free Market Fails When