Which of the following sources of market inefficiency would be most easily exploited by arbitrageurs in a competitive market?

• A. Monopolistic pricing due to barriers to entry
• B. Externalities such as pollution
• C. Price differences for the same good in different locations
• D. Public goods that are non-excludable

Answer: (C)

Verified step by step guidance

1. Step 1: Understand the concept of arbitrage. Arbitrage involves buying a good or asset in one market at a lower price and simultaneously selling it in another market at a higher price, profiting from the price difference without risk.
2. Step 2: Analyze each source of market inefficiency in terms of arbitrage opportunities. Monopolistic pricing due to barriers to entry limits competition, but arbitrageurs cannot easily bypass these barriers to exploit price differences.
3. Step 3: Consider externalities such as pollution. These are costs or benefits not reflected in market prices, but they do not create direct price differences for the same good that arbitrageurs can exploit.
4. Step 4: Examine price differences for the same good in different locations. This creates a clear opportunity for arbitrageurs to buy low in one location and sell high in another, profiting from spatial price differences.
5. Step 5: Evaluate public goods that are non-excludable. Since these goods are not sold in traditional markets and cannot exclude non-payers, arbitrage opportunities do not arise here.