Market failure occurs when no individual has the ability to substantially influence market prices. a. True...

Market failure occurs when no individual has the ability to substantially influence market prices.

a. True
b. False

Solutions

Expert Solution

Market failure happens when the invisible hand or the market price mechanism cannot explain for all the costs and benefits associated with the provision and consumption of a good. Common examples of market failure are positive and negative externalities, overprovision of demerit goods and under provision of merit goods, lack of public goods, environmental issues and abuse of monopoly power.

Perfect example of an individual having the ability to substantially influence market prices is monopoly. So, when the monopolist restricts outputs in order to maximize profits, they are abusing their monopoly power and the result in market failure.

However, when no individual has the ability to influence market prices, then the market mechanism can efficiently allocate the resources and account for all the costs and benefits associated with the consumption of a good. So, there is no possibility of market failure.

Thus, the given statement in the question is False.

Rahul Sunny answered 9 months ago

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