When external benefits are present in a market:
A) the market is more efficient than if the externalities were not present.
B) the market outcome is inefficient.
C) overall social surplus is maximized because others are gaining in addition to the market consumers.
D) the external benefit must be offset by an external cost.

Question

Quizplus · Accepted Answer

When external benefits are present in a market, the market outcome is inefficient because the market fails to capture the full social benefits that the external benefit creates. In other words, the private benefit enjoyed by the consumer is less than the social benefit to society as a whole, leading to an underproduction of the good.

When External Benefits Are Present in a Market