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Q: Which of the following is an example of market failure?

  • 1
    Prices do not reflect the full social cost of production
  • 2
    A firm goes out of business because it cannot find a market for its products
  • 3
    Prices rise so that the consumers cannot afford the products they want to buy
  • 4
    Producer surplus is maximized
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Answer : 1. "Prices do not reflect the full social cost of production"
Explanation :

Answer: A) Prices do not reflect the full social cost of production Explanation: Prices do not reflect the full social cost of production is an example of Market failure.   A market failure occurs when the supply of a good or service is insufficient to meet demand. This results in an inefficient distribution of resources among market participants. It also occurs if externalities are not accounted for. If a firm fails to maximize its profits this is not a general market failure.

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