When an externality is present, the market equilibrium is
A)efficient, and the equilibrium maximizes the total benefit to society as a whole.
B)efficient, but the equilibrium does not maximize the total benefit to society as a whole.
C)inefficient, but the equilibrium maximizes the total benefit to society as a whole.
D)inefficient, and the equilibrium does not maximize the total benefit to society as a whole.

Question

Quizplus · Accepted Answer

When an externality is present, the market fails to allocate resources efficiently, and as a result, the equilibrium does not maximize the total benefit to society. This is because externalities cause a difference between private and social costs or benefits, leading to overproduction or underproduction from a societal perspective.

When an Externality Is Present, the Market Equilibrium Is