When externalities exist, buyers and sellers
A)neglect the external effects of their actions, but the market equilibrium is still efficient.
B)do not neglect the external effects of their actions, and the market equilibrium is efficient.
C)neglect the external effects of their actions, and the market equilibrium is not efficient.
D)do not neglect the external effects of their actions, and the market equilibrium is not efficient.

Question

Quizplus · Accepted Answer

Externalities occur when the actions of buyers or sellers affect others who are not part of the market transaction, resulting in external costs or benefits. In the presence of externalities, the market equilibrium does not account for these external effects, and therefore, it is not efficient. As a result, buyers and sellers neglect the external effects of their actions, and the market outcome leads to a suboptimal allocation of resources.

When Externalities Exist, Buyers and Sellers