Competitive markets generate an efficient level of production when externalities exist.

Question

Quizplus · Accepted Answer

Competitive markets may generate an efficient level of production in the absence of externalities, but when externalities exist, such as pollution or congestion, the market may not produce the socially optimal level of output. This is because these externalities create costs or benefits that are not reflected in the market price, leading to underproduction or overproduction. Therefore, government intervention may be necessary to internalize these external costs or benefits and reach the socially optimal level of production.

Competitive Markets Generate an Efficient Level of Production When Externalities