When market prices fall short of the true social costs of an activity
A) there are significant benefits to the public at large.
B) resources are underused.
C) society is properly compensated for its losses.
D) there is no economic growth.
E) external diseconomies exist.

Question

Quizplus · Accepted Answer

When market prices fall short of the true social costs of an activity, external diseconomies exist. This means that the cost of the activity is being borne by society as a whole, rather than by the producer or consumer of the activity. This leads to overuse or overproduction of the activity, as the true cost is not being reflected in the market price. As a result, resources may be misallocated and there may be negative consequences for the environment or public health.

When Market Prices Fall Short of the True Social Costs