Market Failure and Resource Misallocation

Steps:

• Define market failure as when free markets fail to allocate resources efficiently, leading to social welfare losses.
• Identify types: externalities, public goods, merit/demerit goods, and information asymmetry.
• Link to merit goods: these are beneficial but undervalued by consumers, causing under-provision.
• Conclude that under-supply of merit goods exemplifies a key consequence.

Why C is correct:

• Merit goods, like education or healthcare, provide positive externalities but are under-supplied in free markets due to incomplete consumer valuation, per economic theory on externalities.

Why the others are wrong:

• A: Complete information prevents market failure by enabling efficient choices, not causing it.
• B: Disequilibrium is a short-term adjustment issue, not a core market failure outcome.
• D: Declining demand reflects normal market response, not failure.

Final answer: C