(a) widespread use of internet has created (b) a panic in the music industry, which face a problem (c) of lesser sales, as more of its customers get their desired music files from the internet, free of cost.

1. (a)
2. (b)
3. (c)
4. no error

The sentence that has an error is 2. (B) a panic in the music industry, which face a problem.

The grammar rule holds that Simple Present Tense verbs of the singular of third-person should be added the suffixes "s", "es" or "ies" at the end of the base form of the verb. In this case, "a panic in the music industry" is a noun in third-person singular, therefore the correct form of the verb is "FACES".