Externalities:
A) are not reflected in market prices, so they can be a source of economic inefficiency.
B) do become reflected in market prices, so they can be a source of economic inefficiency.
C) are not reflected in market prices, so they do not adversely affect economic efficiency.
D) do become reflected in market prices, so they do not adversely affect economic efficiency.
E) may or may not become reflected in market prices, but do not have an impact on economic efficiency in either event.

Question

Quizplus · Accepted Answer

Externalities refer to costs or benefits that are not fully reflected in the market price. Because they are not factored into market prices, they can create economic inefficiencies. For example, pollution from a factory may have negative effects on the environment and public health, but these costs are not reflected in the price of the goods produced by the factory. As a result, the market may over-produce these goods, leading to an inefficient allocation of resources.