In the context of economics, which of the following is most commonly considered the primary cause of market failures (collisions) in a competitive market?

• A. Externalities
• B. Perfect information
• C. Unlimited resources
• D. Equilibrium pricing

Answer: (A)

Verified step by step guidance

1. Understand the concept of market failure: Market failure occurs when the allocation of goods and services by a free market is not efficient, leading to a loss of economic and social welfare.
2. Identify common causes of market failure: These typically include externalities, public goods, information asymmetry, and market power.
3. Analyze each option: Perfect information usually prevents market failure rather than causes it; unlimited resources are not realistic and do not cause failure; equilibrium pricing is a feature of markets, not a cause of failure.
4. Focus on externalities: Externalities occur when a third party is affected by a transaction they are not involved in, causing the market outcome to be inefficient.
5. Conclude that externalities are the primary cause of market failures in competitive markets because they lead to overproduction or underproduction relative to the socially optimal level.