Multiple Choice
Which of the following is NOT an example of a permanent difference between private and social costs or benefits due to externalities?
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7. Externalities
Externalities: Social Benefits and Social Costs
Multiple Choice
Which of the following are examples of market failure?
A
No barriers to entry or exit in markets
B
Consumers and producers having complete information
C
Negative externalities such as pollution
D
Perfect competition in all markets
Verified step by step guidance1
Step 1: Understand the concept of market failure. Market failure occurs when the allocation of goods and services by a free market is not efficient, often leading to a net social welfare loss.
Step 2: Identify characteristics that typically indicate market failure, such as externalities (positive or negative), public goods, information asymmetry, or market power (monopolies).
Step 3: Analyze each option: 'No barriers to entry or exit' and 'Consumers and producers having complete information' describe conditions for perfect competition, which usually leads to efficient market outcomes, not failure.
Step 4: Recognize that 'Negative externalities such as pollution' represent a classic example of market failure because the social cost exceeds the private cost, causing overproduction and welfare loss.
Step 5: Conclude that 'Perfect competition in all markets' implies efficient outcomes, so it is not an example of market failure.
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