The total gains in surplus from internalizing the externality:
A)outweigh the losses.
B)are less than the losses.
C)exactly equal the losses.
D)None of these is necessarily true.

Question

Quizplus · Accepted Answer

When an externality is internalized, the market reaches a new equilibrium where the marginal social cost equals the marginal social benefit, resulting in a more efficient allocation of resources. This leads to an increase in total surplus, which is the sum of consumer surplus and producer surplus. The total gains in surplus from internalizing the externality usually outweigh the losses, as the increase in surplus from internalizing the externality is greater than the decrease in surplus caused by the cost of internalizing the externality. Therefore, the correct answer is A.

The Total Gains in Surplus from Internalizing the Externality