Which scenario exemplifies a market failure?

Market failure occurs when the allocation of goods and services by a free market is not efficient, leading to a net loss of economic value. The scenario of unregulated pollution affecting public health exemplifies market failure because it highlights a situation where the costs of a good or service are not fully borne by the producer. In this case, the negative externalities—such as health issues and environmental degradation—are not reflected in the market price, resulting in overproduction of goods that generate pollution.

When companies do not account for the harmful effects of their pollution, society bears the burden of those costs. This leads to a misallocation of resources since the market does not appropriately discourage harmful activities. Therefore, the overall social welfare is reduced, illustrating a failure of the market to provide optimal outcomes.

In contrast, the other scenarios depict situations that do not represent market failure. Increased competition, innovation leading to lower prices, or increased supply driving prices down are all indicators of a functioning market that adjusts to changes in demand and supply. These conditions generally enhance efficiency rather than demonstrate a breakdown in market operations.