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September 3, 2015

Homework Help: Econ MC

Posted by Anonymous on Friday, March 9, 2007 at 12:44am.

Externalities cause markets to
a. fail to allocate resources efficiently.
b. cause price to be different than the equilibrium price.
c. benefit producers at the expense of consumers.
d. cause markets to operate more equitably.

I think the answer is a)??

I agree

but b seems right too, because it will cause price to be different, won't it?

b) I dont believe is right. The market with the externality will have an equilibrium price. While this price will be different than the socially optimum price, the price will be in equilibrium. (Barring any changes in tastes, technology, etc, any fluxuations in prices will cause an imbalance between Q supplied and Q demanded -- eventually the price settle back to the equilibrium price)

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