Externalities lead to inefficient resource allocation

Steps:

• Define market failure as when free markets fail to allocate resources efficiently.
• Identify causes like externalities, where social costs/benefits differ from private ones.
• Evaluate choices: A implies no externalities; B is a solution, not cause; C shows positive externalities; D assumes ideal efficiency.
• Select C as it directly causes underproduction of beneficial goods.

Why C is correct:

• External benefits (positive externalities) mean social benefits exceed private benefits, leading to underproduction since producers ignore spillover gains (per Pigouvian externality theory).

Why the others are wrong:

• A: Equal costs mean no externalities, so markets function efficiently.
• B: Government intervention corrects failures, doesn't cause them.
• D: Perfect competition achieves Pareto efficiency, preventing failure.

Final answer: C