Question

Which of the following is not a market failure? Explain why

a) A market where buyers have too many options.

b) A private good causing a positive externality.

Answer 1

Answer -

Option - A

Market failure is caused when there is disequilibrium between quantity demanded and quantity supplied. There are various factors which cause market failure such as externalities, monopoly etc. In a market where buyers have too many options, it leads to the fair practices in the market instead of market failure because nobody can control price and quantity supplied because of the presence of competitors.

On the other hand externalities leads to market failure because in this case, third party gets the benefits for which it has not paid and it leads to free rider problem in the economy and creates disequilibrium between buyer's benefit and cost of the products and utilities.

Answer 2

Explanation:

• Market failure occurs when the free market doesn’t allocate resources efficiently, leading to problems like monopolies, externalities, or lack of public goods.

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• Option a) Having "too many options" isn’t a market failure. While it might feel overwhelming for buyers, it doesn’t represent an inefficiency in resource allocation. In fact, more choices usually indicate a competitive and healthy market.

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• Option b) A private good causing a positive externality (e.g., education or vaccinations) is a market failure because the social benefits exceed private benefits, leading to underproduction without government intervention.

The correct answer is a) A market where buyers have too many options.

Summary:

Too many options = not a market failure (just a personal preference issue).
Positive externalities = a market failure (because society could benefit more than the market delivers on its own)