What is a market failure? A. A market failure is when production occurs at high
ID: 1104158 • Letter: W
Question
What is a market failure?
A.
A market failure is when production occurs at high social cost.
B.
A market failure is when the market fails to produce deadweight loss.
C.
A market failure is when the market fails to produce the efficient level of output.
D.
A market failure is when consumption occurs at low social benefit.
E.
All of the above.
When is market failure likely to arise? (Check all that apply.)
A.
Market failure is likely to arise from a market shortage.
B.
Market failure is likely to arise when it is difficult to enforce property rights.
C.
Market failure is likely to arise when property rights are incomplete.
D.
Market failure is likely to arise from a market surplus.
E.
Market failure is likely to arise from scarcity.
Explanation / Answer
(1) (C)
When production volume and price in the market equilibrium are sub-optimal and different from socially optimal levels, there is said to exist a market failure. A market failure results in deadweight loss.
(2) Options (A), (B), (C) and (D) are correct.
A government intervention like price floor or price ceiling causes market shortage or surplus, which leads to market failure. Also, zero or incomplete property rights or its implementation gives rise to market failure.
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