Private markets fail to reach a socially optimal equilibrium when negative externalities are present because
A)social costs equal private costs at the private market solution.
B)private costs exceed social costs at the private market solution.
C)social costs exceed private costs at the private market solution.
D)they internalize externalities.

Question

Quizplus · Accepted Answer

Private markets only consider private costs in determining the production and consumption of goods and services. However, negative externalities impose costs on third parties that are not reflected in the market price. Therefore, social costs exceed private costs, and the private market solution does not lead to a socially optimal equilibrium.

Private Markets Fail to Reach a Socially Optimal Equilibrium When