The correct answer is A. increasing returns to scale.
Market failure is a situation in which the market fails to allocate resources efficiently. This can happen for a number of reasons, such as externalities, public goods, and market power.
Externalities are costs or benefits that are not paid for by the person who causes them. For example, when a factory pollutes the air, the people who live near the factory are harmed, but the factory does not have to pay for the harm that it causes. This is an externality.
Public goods are goods that are non-rival and non-excludable. Non-rival means that one person’s use of the good does not reduce the amount of the good that is available to others. For example, national defense is a public good. If one person benefits from national defense, everyone benefits. Non-excludable means that it is impossible to prevent people from using the good, even if they do not pay for it. For example, streetlights are a public good. It is impossible to prevent people from using streetlights, even if they do not pay for them.
Market power is the ability of a firm to raise prices above the competitive level. This can happen when a firm is the only seller of a good or service, or when there are a few firms that control the market.
Increasing returns to scale is a situation in which a firm’s costs decrease as its output increases. This can happen because as a firm produces more, it can spread its fixed costs over a larger number of units.
Market failure can arise in the case of externalities, public goods, and market power. However, it does not arise in the case of increasing returns to scale. This is because in the case of increasing returns to scale, firms are able to produce goods at a lower cost than the competitive price. This means that there is no incentive for firms to form monopolies or to charge prices above the competitive level.