Suppose that there are two goods, X and Y, that are competing for dominance in a market with network externalities. Furthermore, suppose that the market has chosen good X even though it is inferior to good Y and that the net benefits of switching from X to Y are $20 while the costs of switching are $30. If the market stays with good X, then has occurred. If the costs of switching were to fall to $15 and the market still stays with good X then .

Suppose that there are two goods, X and Y, that are competing for dominance in a market with network externalities. Furthermore, suppose that the market has chosen good X even though it is inferior to good Y and that the net benefits of switching from X to Y are $20 while the costs of switching are $30. If the market stays with good X, then has occurred. If the costs of switching were to fall to $15 and the market still stays with good X then .

A) No market failure; market failure has occurred.

B) Market failure; no market failure has occurred.

C) No market failure; there will still be no market failure.

D) Market failure; there will still be market failure.

The correct answer is A)

Suppose that there are two goods, X and Y, that are competing for dominance in a market with network externalities. Furthermore, suppose that the market has chosen good X even though it is inferior to good Y and that the net benefits of switching from X to Y are $20 while the costs of switching are $30. If the market stays with good X, then No Market Failure has occurred. If the costs of switching were to fall to $15 and the market still stays with good X then Occurred

Explanation:

Market failure is the economic situation defined by an inefficient distribution of goods and services in the free market.

Reasons for market failure include: positive and negative externalities, environmental concerns, lack of public goods, under provision of merit goods, over provision of demerit goods, and abuse of monopoly power.

In the question above, we see that at first there is a substandard good but people stick to it because it cost much more to switch than to enjoy the utility derivable from the good. This is logical. So there the forces of the market (price, demand and supply) are functional by themselves.

On the other hand, the cost of switching falls below the value of the benefit derivable. Logically, because it is an inferior good, people ought to switch because there is a better alternative. However because the market stays same, it means that the forces have failed to adjust accordingly.

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