Total surplus in the presence of an externality that has not been internalized:
A)is greater than total surplus when the externality is internalized.
B)is less than total surplus when the externality is internalized.
C)is the same as total surplus when the externality is internalized.
D)is zero,since it has not been internalized.

Question

Quizplus · Accepted Answer

In the presence of an externality that has not been internalized, the market equilibrium does not take into account the cost or benefit to society as a whole. As a result, the market quantity can be too high (if the externality is negative) or too low (if the externality is positive). Internalizing the externality either through regulation or taxes can lead to a more efficient allocation of resources and increase total surplus. Therefore, total surplus is generally higher when the externality is internalized, and option B is the correct answer.

Total Surplus in the Presence of an Externality That Has