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Homework answers / question archive / Which of the following can lead to market failure: A) externalities and market power, B) externalities but not market power, C) market power but not externalities, D) neither externalities nor market power
Which of the following can lead to market failure:
A) externalities and market power,
B) externalities but not market power,
C) market power but not externalities,
D) neither externalities nor market power.
Answer: A
Both externalities and market power can cause a market failure. The latter can cause a market failure in a case like a monopoly artificially limiting supply to boost prices. The former can be caused by a factory pumping pollution into the air which has negative effects on the residents near the factory. Both can result in an inefficient allocation of resources and thus the answer is A.
