Which of the following can lead to market failure?
A)externalities and market power
B)externalities but not market power
C)market power but not externalities
D)neither externalities nor market power

Question

Quizplus · Accepted Answer

Externalities (positive or negative effects of the production or consumption of a good that affect third parties) can lead to market failure by creating inefficient outcomes as private individuals or firms do not take into account the full social costs or benefits. Market power (the ability of a single firm or group of firms to control the market price) can also lead to market failure by reducing competition and leading to higher prices and lower output than would be the case under perfect competition. Therefore, only option A, which includes both externalities and market power, can lead to market failure.

Which of the Following Can Lead to Market Failure