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 don't 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)
You are correct in choosing answer a. Externalities cause markets to fail to allocate resources efficiently. While externalities can potentially influence price, the key issue that arises from externalities is the inefficiency in resource allocation, which makes option a the most accurate answer. As explained, the market will still have an equilibrium price despite the presence of externalities.
You are correct that option (a) is the correct answer. Externalities cause markets to fail to allocate resources efficiently.
Externalities are the costs or benefits that are imposed on a third party who is not directly involved in a transaction. These external costs or benefits are not accounted for by the market participants, leading to inefficient allocation of resources.
For example, if a factory emits pollution into the air, it imposes a cost on the surrounding community in terms of health and environmental damage. However, the factory does not bear the full cost of this pollution, leading to overproduction and overconsumption. In this case, the market fails to allocate resources efficiently because the factory is not internalizing the external cost of pollution.
Option (b), which states that externalities cause price to be different than the equilibrium price, is not correct because the market still reaches equilibrium, but at a socially suboptimal level. The price will adjust to a level where quantity supplied equals quantity demanded, but this price does not take into account the external costs or benefits.
Option (c) is not necessarily true in all cases of externalities. Externalities can either benefit or harm producers and consumers, depending on the nature of the externality. It is the third-party who is affected, and it can be either positive or negative for the parties directly involved in the transaction.
Option (d) is also not correct as externalities do not necessarily lead to more equitable market operations. Externalities create market failures and can result in inequality in the distribution of resources or benefits.
So, in summary, the correct answer is (a) externalities cause markets to fail to allocate resources efficiently.
You are correct, externalities do cause markets to fail to allocate resources efficiently, which is option a). This is because externalities are costs or benefits that are not reflected in the price of the good or service traded in the market. As a result, the market does not take into account the full social cost or benefit of production or consumption.
While it is true that externalities can cause the price to be different from the equilibrium price, this is not always the case. Externalities can either increase or decrease the price, depending on the nature of the externality and the market conditions. Therefore, option b) is not the most accurate answer.
Option c) is not directly related to the impact of externalities. While it is true that externalities can result in benefits for producers at the expense of consumers or vice versa, this is not the primary consequence of externalities. Externalities fundamentally affect the allocation of resources rather than the distribution of benefits between producers and consumers.
Option d) is also incorrect. Externalities do not necessarily lead to more equitable market operations. They can create market failures and inefficiencies, leading to outcomes that are less equitable for society as a whole.
In summary, the correct answer is indeed a) externalities cause markets to fail to allocate resources efficiently.