Which of these statements is TRUE in the case of externalities?
I. In the case of externalities, prices do not reflect the true cost or benefit of the product.
II. In the case of externalities, prices sometimes send the wrong signals about a market.
III. Externalities discourage new producers from entering the industry since the price always remains about the efficient price.
A) I and II only
B) I and III only
C) II and III only
D) I, II, and III

Question

Quizplus · Accepted Answer

Statement I is true as externalities cause prices to not accurately reflect the true cost or benefit of a product. Statement II is also true as prices can sometimes send incorrect signals regarding the market due to externalities. However, statement III is false as externalities can actually encourage new producers to enter the industry if prices do not fully reflect costs, allowing for potential profits.

Which of These Statements Is TRUE in the Case of Externalities