Which of the following situations is most likely to prompt government intervention in markets?

• A. When goods are non-rival and non-excludable
• B. When all market participants have perfect information
• C. When negative externalities, such as pollution, affect third parties
• D. When there is perfect competition and no market failures

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of market failures, which occur when the free market does not allocate resources efficiently, leading to a loss of social welfare.
2. Step 2: Recognize that government intervention is typically prompted by market failures such as externalities, public goods, information asymmetries, or monopolies.
3. Step 3: Identify that non-rival and non-excludable goods are public goods, which can lead to free-rider problems and may require government intervention, but this is not the only or most common reason.
4. Step 4: Note that perfect information and perfect competition imply efficient markets with no failures, so government intervention is less likely in these cases.
5. Step 5: Understand that negative externalities, like pollution affecting third parties, represent a classic market failure where private costs differ from social costs, making government intervention necessary to correct the externality.