Practice prompt · Q:economics-and-market-foundations/diagnose-market-failure-001

Diagnose market failure before selecting a remedy

Require a benchmark, mechanism, affected parties, evidence, alternatives, and implementation risk rather than labeling any disliked outcome a market failure.

Updated Aug 7, 2026 Review due Nov 7, 2026

Practice

Check your answer

Choose a response, then check the answer and explanation.

A reviewer alleges that Linden chair disposal harms nearby residents, but the market model contains only buyers and sellers and no harm estimate. What is the strongest next step?

Choose the best answer. a Name affected parties and the benchmark, test the disposal-harm mechanism and magnitude, explain why current prices or institutions omit it, then compare feasible contractual, legal, organizational, and public responses with implementation and distribution risks. b Call the outcome a market failure because any equilibrium with an unhappy neighbor is inefficient by definition, then impose the first available price control. c Reject the allegation because a clearing market can never omit social costs.

Your answer stays on this page. It is not sent or saved.

Show explanationHide explanation

Answer: a

Choice a. A market-failure diagnosis names the market, benchmark, violated mechanism, evidence, affected parties, alternatives, authority, and implementation risk before recommending action.