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Which of the following does NOT represent a market failure? a
Which of the following does NOT represent a market failure?
a. Insufficient production of public goods, such as highways and national defense.
b. Imperfect competition such as monopolies.
c. Bankruptcies exist in the economy.
d. Negative externalities such as pollution.
Expert Solution
The answer is c.
Markets fail when market outcomes are different from the socially optimal outcomes. There are many cases market could and do fail. For example, when there is positive externality, market tends to produce less than the socially optimal quantity. When there is negative externality, market tends to produce more than what is socially optimal. When there is insufficient competition, some firms could develop market power and produce less than what is socially optimal (e.g., monopoly).
However, bankruptcy per se is not necessarily a market failure, unless one believes that there should be no bankruptcy in a socially optimal equilibrium. If not, the existence of bankruptcy does not indicate market failure.
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