In the absence of externalities, the invisible hand of the market place:
A) increases the transaction cost of contracting between parties to an exchange
B) is unable to resolve inherent inefficiencies in the market system
C) induces people to act in a manner inconsistent with self-interest
D) leads to a market outcome that maximises total benefit to society

Question

Quizplus · Accepted Answer

The invisible hand of the market place leads to a market outcome that maximizes the total benefit to society in the absence of externalities. Externalities are the costs or benefits that arise from economic activities and are not reflected in market prices. When externalities are present, market outcomes may not be optimal, but in their absence, the invisible hand of the market allocates resources efficiently and maximizes the overall welfare of society.

In the Absence of Externalities, the Invisible Hand of the Market