If there are significant externalities present, then:
A) prices will still send the correct signal in a free market.
B) the invisible hand still works perfectly.
C) there will not be an ideal balance of resources between industries.
D) creative destruction won't work.

Question

Quizplus · Accepted Answer

Externalities occur when the actions of one party have an impact on others who are not involved in that transaction. In such a situation, prices fail to account for the full social cost or benefit of the activity, which creates a divergence between private and social costs. This results in a suboptimal allocation of resources, as some activities that are socially beneficial may be underproduced, while others that are socially harmful may be overproduced. Therefore, there will not be an ideal balance of resources between industries. Option A and B are incorrect because prices will not send the correct signal in a free market, and the invisible hand will not work perfectly in the presence of externalities. Option D is not directly related to externalities.

If There Are Significant Externalities Present, Then