Situation 1: The motorcycle helmet market has 13 companies, and four firm concentration ratio of 26%. While the helmets have a variety of designs, they are sold at very similar prices. Recently, the death rate from head injuries in motorcycle crashes has been rising. The producers advertise their helmets as “effective,” but some helmets withstand most falls and others are produced with materials that are more likely to crack in commonly experienced falls. The weaker helmets cost about $8 less to produce. There is no simple way for consumers to determine helmet safety.

a) This is a case of market failure caused by externalities emanating from some production agents of the helmets producing lower quality hence weaker helmets while still pricing them at the same price level as the safer, higher quality helmets. This causes a high negative production externality as the consumers will eventually lump all helmets as unsafe, which will negatively affect the other companies as the consumers cannot determine easily the safety of the different brands of helmets. Thus, the consumers may opt to forego riding motorcycles altogether. b) Since the producing agents of the weaker helmets are only considering maximizing the profits at the expense of quality and safety, they do not take into consideration the social costs associated with the use of weaker helmets.
Initially, the production agents for these weaker helmets will receive high marginal benefits than marginal costs due to the use of heaper production materials. However, the do not take into account the effect f the cost to society in the form of head injures and deaths resulting from the use of these helmets.
The marginal benefit for the weaker helmets will be higher than the marginal costs hence the market will be allocating inefficient. The lower production cost and higher profits will create a false market