Which term best describes a situation in a market where the forces of supply and demand result in an inefficient allocation of resources?

• A. Consumer surplus
• B. Market failure
• C. Producer surplus
• D. Market equilibrium

Answer: (B)

Verified step by step guidance

1. Understand the key terms involved: Consumer surplus is the difference between what consumers are willing to pay and what they actually pay; Producer surplus is the difference between the price producers receive and their minimum acceptable price; Market equilibrium is the point where quantity supplied equals quantity demanded.
2. Recognize that an efficient allocation of resources occurs when the market equilibrium maximizes total surplus (the sum of consumer and producer surplus), meaning no resources are wasted or misallocated.
3. Identify that when the market forces of supply and demand fail to allocate resources efficiently, this situation is called a market failure.
4. Recall that market failure can arise due to reasons such as externalities, public goods, information asymmetry, or market power, which prevent the market from reaching an efficient outcome.
5. Conclude that the term describing an inefficient allocation of resources caused by supply and demand forces is 'Market failure'.