Which statement best describes market failure?

• A. Failure of the Free Market to Be Fair (e.g., monopoly, demerit goods, high cost of entry)
• B. Government Intervention to Fix Markets
• C. Efficiency Improvements
• D. Consumer Surplus

Answer: (A)

Market failure happens when the free market does not allocate resources efficiently, leading to welfare losses. The statement points to situations where competition is imperfect or market power distorts outcomes, so prices and quantities don’t reflect true social costs and benefits. A monopoly restricts output and raises prices, creating a deadweight loss and a misallocation of resources. Demerit goods involve negative social costs that aren’t fully reflected in prices, so over-consumption occurs from the market’s perspective. High barriers to entry reduce competition, allowing inefficiencies to persist. These features illustrate how a market can fail to produce the most desirable allocation of resources on its own.

The other options describe responses or measures rather than what market failure is: government intervention to fix markets is a remedy, efficiency improvements are positive outcomes, and consumer surplus is a measure of welfare, not a description of failure.