An example of the way that externalities distort the allocation of resources is
A) positive economic surplus.
B) positive externalities only.
C) negative externalities only.
D) negative economic surplus.
E) both positive externalities and negative externalities.

Question

Quizplus · Accepted Answer

Externalities can be positive or negative, meaning they can either create benefits or costs to parties not directly involved in a transaction. These externalities are not reflected in the price of the good, causing a distortion in resource allocation. When positive externalities exist, market outcomes may result in a lower quantity of goods produced and consumed than is socially optimal, and when negative externalities exist, market outcomes may result in a higher quantity of goods produced and consumed than is socially optimal. Therefore, both positive and negative externalities can cause a distortion in resource allocation.

An Example of the Way That Externalities Distort the Allocation