Markets may not achieve an efficient allocation of resources when there are
A)public goods.
B)external benefits.
C)monopolies.
D)subsidies.
E)all of the above

Question

Quizplus · Accepted Answer

Markets may fail to achieve an efficient allocation of resources in the presence of public goods, external benefits, monopolies, and subsidies.

In the case of public goods, the market may fail to provide them in the right quantity as they are non-excludable and non-rival in consumption. There is no incentive for private firms to provide public goods as everyone can consume them without paying for them.

External benefits occur when the consumption or production of a good generates benefits to third parties who are not a party to the transaction. In this case, the market may under-produce the good.

In the case of monopolies, the market may not allocate resources efficiently as the monopolist may charge a higher price and produce less than the socially efficient level of output.

In the case of subsidies, the market may over-produce the subsidized goods. The subsidies increase the supply of the subsidized goods and incentivize producers to produce them beyond the socially efficient level.

Markets May Not Achieve an Efficient Allocation of Resources When