Markets fail when externalities are present _____
A)because all the costs and benefits of producing goods are reflected in the market prices of the goods.
B)because some of the costs and benefits of producing goods are not reflected in the market prices of the goods.
C)because monopoly power arises.
D)because profits are not maximized.
E)because there is underprovision of merit goods.

Question

Quizplus · Accepted Answer

Externalities are costs or benefits that are not reflected in the price of a good or service. If externalities are present, the market fails to allocate resources efficiently because there is a divergence between private costs and social costs, or private benefits and social benefits. In the presence of negative externalities, such as pollution, the price of the product will be too low compared to the true cost of producing it, leading to overproduction and overconsumption. In the presence of positive externalities, such as education, the price of the product will be too high compared to the true social benefit it provides, leading to underproduction and underconsumption.

Markets Fail When Externalities Are Present _____