Below is the market for nonfat decaf lattes. Shade total consumer surplus (CS) on the graph by correctly placing the CS shaded area. S CS Price Quantity ent Score: 39.6% Resources 55 Give Up? Hint Chec 6 of 12 > Answer Bank Market failure occurs when either external costs or benefits are present Market failure occurs when external benefits are present but not when external costs are present. Market failure can occur only in the presence of external costs, Government sometimes intervenes when marker failure occurs. Market failure occurs when external costs are present but not when external benefits are present. Market failure is when free markets provide a suboptimal amount of goods and services
The Correct Answer and Explanation is:
Correct Answer:
✅ Market failure is when free markets provide a suboptimal amount of goods and services.
✅ Explanation
Market failure occurs when the free market, left to its own devices, does not allocate resources efficiently, resulting in suboptimal production or consumption of goods and services. This inefficiency typically means that total social welfare (the sum of consumer and producer surplus) is not maximized.
Free markets rely on supply and demand to determine prices and quantities. When all costs and benefits are fully reflected in market prices, the outcome is usually efficient. However, in reality, externalities (costs or benefits that affect third parties who are not directly involved in a transaction) often disrupt this balance. These externalities are the main causes of market failure.
- External costs (negative externalities), such as pollution, lead to overproduction. Producers do not bear the full cost of production, so the good is cheaper and more is produced than is socially optimal.
- External benefits (positive externalities), such as education or vaccinations, lead to underproduction. Because individuals or firms cannot capture all the benefits, there is less incentive to produce or consume the socially desirable amount.
In both cases, the market equilibrium deviates from the socially optimal equilibrium, which is why market failure is said to result in a suboptimal amount of goods and services.
Governments may intervene in cases of market failure through:
- Taxes or regulations (to address external costs),
- Subsidies or public provision (to support external benefits),
- Antitrust laws (to correct monopoly power),
- Provision of public goods (like defense or street lighting),
- Information disclosure requirements (to address asymmetry).
Hence, the correct answer encapsulates the general nature of market failure more accurately than any limited description involving only external costs or benefits. It acknowledges the broader context in which markets can fail to deliver optimal outcomes, prompting government intervention when necessary.
