Which of the following describes market failure due to productive and allocative inefficiency?

• A. Productive and Allocative Inefficiency
• B. Mixed Economic System
• C. Rationing
• D. Lottery

Answer: (A)

The idea being tested is how market failure arises when resources aren’t used efficiently in both production and the way goods are allocated to people. Productive inefficiency means firms aren’t producing at the lowest possible cost, so resources like labor, capital, and materials aren’t used with maximum efficiency. Allocative inefficiency means the mix of goods being produced doesn’t reflect what society values, so the price does not reflect marginal cost and the quantity produced isn’t the one that would maximize overall welfare. When these inefficiencies occur together, the market fails to produce the right amounts of goods at the right costs, creating a welfare loss.

The other terms describe different ideas: a mixed economic system is about combining markets with some government intervention, not a description of inefficiency causing market failure; rationing and lottery are methods of allocating scarce resources, not explanations of inefficiency-driven market failure.