Market failure occurs when which of the following happens?

Market failure occurs when resources cannot be efficiently distributed within the economy. This scenario often arises due to various reasons, including externalities, public goods, information asymmetries, and market power. When there's market failure, it indicates that the market is not achieving Pareto efficiency, meaning that it is possible to make at least one individual better off without making anyone worse off.

In the context of efficient resource allocation, this means that the market is failing to optimize the distribution of goods and services, leading to overproduction or underproduction. For example, a negative externality, such as pollution, can cause the market to overproduce goods that generate social costs not reflected in prices, thus leading to inefficient resource allocation.

Options suggesting that the market efficiently allocates resources, consumers having perfect information, or supply meeting demand perfectly point toward scenarios of market efficiency rather than failure. In those cases, the market is functioning optimally without issues in resource distribution. Therefore, recognizing the inability of the market to efficiently distribute resources is the key characteristic of market failure.