Which of the following is a potential problem in market economies?

• A. Market failure due to externalities
• B. Absence of competition among firms
• C. Guaranteed equal income distribution
• D. Perfect allocation of resources at all times

Answer: (A)

Verified step by step guidance

1. Understand the concept of a market economy: it is an economic system where decisions on production and consumption are guided by the interactions of citizens and businesses in markets.
2. Recall that market failure occurs when the allocation of goods and services by a free market is not efficient, often leading to a net social welfare loss.
3. Identify externalities as a key source of market failure: these are costs or benefits of economic activities that affect third parties and are not reflected in market prices.
4. Evaluate the options given: absence of competition, guaranteed equal income distribution, and perfect allocation of resources are either not typical features or not guaranteed in market economies.
5. Conclude that 'Market failure due to externalities' is a potential problem in market economies because externalities cause markets to fail to allocate resources efficiently.