Which of the following types of market failure can lead to deadweight loss in a market?

• A. Constant returns to scale
• B. Externalities
• C. Perfect competition
• D. Full information

Answer: (B)

Verified step by step guidance

1. Understand the concept of deadweight loss: Deadweight loss occurs when the allocation of resources is not efficient, leading to a loss of total surplus in the market.
2. Identify the types of market failure: Market failures include externalities, public goods, information asymmetry, and market power, among others.
3. Analyze each option in terms of market failure and deadweight loss:
4. - Constant returns to scale imply that output increases proportionally with inputs, which does not inherently cause market failure or deadweight loss.
5. - Externalities occur when a third party is affected by a transaction they are not involved in, causing a divergence between private and social costs or benefits, which leads to deadweight loss.
6. - Perfect competition is a market structure characterized by many buyers and sellers with full information and no market power, which typically leads to efficient outcomes without deadweight loss.
7. - Full information means all parties have complete knowledge about the product or market, reducing information asymmetry and thus reducing deadweight loss.
8. Conclude that among the options, externalities are the type of market failure that can lead to deadweight loss because they cause inefficiencies in resource allocation.