Question

Market failure occurs when:

	prices of essential goods such as gas become very high.
	individual actions have side effects that are not properly taken into account.
	mutually beneficial trades take place.
	a business declares bankruptcy.

Answer 1

Ans is B

Externality is the action of individual that have effect on society and which is not considered in setting price.

Market failure occur when market produces a quantity where social cost is not equal to social benefit. Normally market equate private marginal cost=private marginal benefit. But we know in case of externality, social cost or social bemefit differs from pvt. In case of positive externality, social benefit>private benefit and market produces less of these goods whereAs in case of negative externality, social cost>private cost and market produces excess number compared to socail point.