FSOT Full Test Bank

Answer: C - A market failure occurs when the market does not allocate resources efficiently. This can happen where there are externalities, asymmetric information, monopolies, moral hazard, or public goods. One example is pollution, which is a negative externality. If one company saves money by polluting but the pollution drives another company out of business, the pollution has not been properly priced, because overall the market has lost value. Pollution can be re-priced through government regulation.