When misallocation of resources for production of a good results in spillover effects on third parties, there is a
A) market failure.
B) government failure.
C) legislative failure.
D) productive failure.

Question

Quizplus · Accepted Answer

Misallocation of resources resulting in negative spillover effects on third parties is a classic example of market failure. In such cases, the market fails to take into account the full cost of production, and as a result, too much of the good is produced, leading to negative externalities. Governments can intervene in such cases, for example, by imposing taxes or regulations that internalize the cost of negative externalities. However, the fact that there is misallocation in the first place is a clear indication of market failure. Government or legislative failure or productive failure would refer to other types of issues unrelated to spillover effects.

When Misallocation of Resources for Production of a Good Results