A situation in which a market left on its own fails to allocate resources efficiently. Where the social costs outweigh the social benefits is called?

A situation in which a market left on its own fails to allocate resources efficiently. Where the social costs outweigh the social benefits is called?

• A. Market Failure
• B. Allocative Efficiency
• C. Productive Efficiency
• D. Free Rider

Answer: (A)

Market failure describes a situation where a market left to operate on its own does not allocate resources to maximize overall welfare. When social costs outweigh social benefits, the price signals in the market don’t reflect the true cost to society, so too much of the harmful activity is produced or consumed. This creates a deadweight loss and a misallocation of resources, which is exactly what market failure is about. Allocative efficiency is the opposite state you’re aiming for—where social benefits equal social costs. Productive efficiency is about producing at the lowest possible cost, not about whether the right mix of goods is being produced for society. A free rider problem relates to people benefiting from a good without paying for it, common with public goods, but it doesn’t define the broader concept of market failure.

Market failure describes a situation where a market left to operate on its own does not allocate resources to maximize overall welfare. When social costs outweigh social benefits, the price signals in the market don’t reflect the true cost to society, so too much of the harmful activity is produced or consumed. This creates a deadweight loss and a misallocation of resources, which is exactly what market failure is about.

Allocative efficiency is the opposite state you’re aiming for—where social benefits equal social costs. Productive efficiency is about producing at the lowest possible cost, not about whether the right mix of goods is being produced for society. A free rider problem relates to people benefiting from a good without paying for it, common with public goods, but it doesn’t define the broader concept of market failure.