Question

When an externality is present, the market equilibrium is a. efficient, and the equilibrium maximizes the total benefit to society as a whole. b. efficient, but the equilibrium does not maximize the total benefit to society as a whole. c. inefficient, but the equilibrium maximizes the total benefit to society as a whole. d. inefficient, and the equilibrium does not maximize the total benefit to society as a whole.

Answer 1

Answer:

D. inefficient, and the equilibrium does not maximize the total benefit to society as a whole.

Explanation:

Externalities are benefits or costs incurred by an unrelated third party when a good or service is produced or consumed. Also, we know equilibrium to be the balance between buyer's benefits and producers cost, that is, when demand equals supply.

Now, the presence of externalities in a market equilibrium causes inefficiencies. This occurs when a product equilibrium price does not accurately reflect the true benefit or cost of that product. This exposes the equilibrium as flawed thus rendering it inefficient. This results in individual actors of the economy making decisions on aim of earning benefits which ends up making everything worse for everyone thus, not maximizing total benefits to everyone as a whole.