Since externalities tend to keep markets from reaching a socially optimal equilibrium, government action
A)is always needed because private solutions can never be attained.
B)is needed when private solutions fail to arise.
C)will be needed only to correct for positive externalities.
D)will be needed only to correct for negative externalities.

Question

Quizplus · Accepted Answer

Externalities are market failures that occur when the costs or benefits of a transaction are not fully borne by those involved in the transaction, leading to a suboptimal outcome. In such cases, private solutions may not emerge, and government action may be necessary to correct the market failure and achieve a socially optimal equilibrium. While positive and negative externalities can both be sources of market failure, the need for government intervention is not limited to one type of externality. Therefore, B is the best choice because government action would be needed when private solutions fail to arise.

Since Externalities Tend to Keep Markets from Reaching a Socially