In what sense do externalities cause the "invisible hand" of the marketplace to fail?
A)Externalities lead to government intervention in markets, which exacerbates the problems associated with externalities.
B)Externalities result in prices that are too high for many consumers to pay.
C)Markets fail to produce the maximum total benefit to society when positive or negative externalities are present.
D)Markets produce too little of a good when positive or negative externalities are present.

Question

Quizplus · Accepted Answer

Externalities are costs or benefits that accrue to individuals outside of the market transaction. When externalities are present, markets do not produce the maximum total benefit to society because the cost or benefit to society is not reflected in the market price. For example, the negative externality of pollution from a factory is not reflected in the price of the goods produced by the factory, leading to overproduction and excessive pollution. Similarly, a positive externality like education may not be fully provided by the market because the benefits are not fully reflected in the price. As a result, the "invisible hand" of the marketplace fails to allocate resources efficiently and government intervention may be necessary to correct for the externality.

In What Sense Do Externalities Cause the "Invisible Hand" of the Marketplace