Monopoly as a Source of Market Failure

Steps:

• Define market failure: When markets fail to allocate resources efficiently, leading to deadweight loss or externalities.
• Identify causes: Common sources include monopolies, externalities, public goods, and asymmetric information.
• Evaluate choices: Assess each option against standard economic causes of inefficiency.
• Select best fit: Monopoly restricts output and raises prices, causing allocative inefficiency.

Why B is correct:

• Monopoly creates market power, allowing a single firm to set prices above marginal cost, violating the efficiency condition where price equals marginal cost (P = MC).

Why the others are wrong:

• A: Many firms promote perfect competition, which achieves efficiency, not failure.
• C: Profit maximization is a standard firm goal in competitive markets and does not inherently cause failure.
• D: Specialization increases productivity and efficiency through division of labor, reducing failure risks.

Final answer: B