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Which of the following is an incidence of market failure? a
Which of the following is an incidence of market failure?
a. Firms change their production plans in response to a tax.
b. The price of a good exceeds the opportunity cost of producing it.
c. The firm producing the good is earning zero economic profit.
d. Consumers change their buying habits in response to a tax.
Expert Solution
The answer is b).
In general, a market failure occurs when a given allocation is not socially optimal. When the price of a good exceeds the opportunity cost of producing it, the allocation is not sufficient because by not producing the good, the society's total surplus could increase. Hence b) represents an incidence of market failure.
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