If external costs exist,the competitive free market:
A)allocates resources inefficiently.
B)allocates resources efficiently.
C)automatically corrects an overallocation of resources.
D)automatically corrects an underallocation of resources.

Question

Quizplus · Accepted Answer

External costs, also known as negative externalities, are costs incurred by individuals or society as a whole that are not reflected in the prices of goods or services. In a competitive free market, firms are only concerned with maximizing their own profits and do not take into account the external costs they impose on others. As a result, the market will allocate resources inefficiently by overproducing goods or services that generate external costs, leading to a misallocation of resources. This is because the market price does not reflect the true cost of production, and consumers will therefore demand more than what is socially optimal.

If External Costs Exist,the Competitive Free Market