When external benefits are present, the market price is ________, however when external costs are present, the market price is ________.
A) too low; too high
B) equal to the efficient price; too low
C) too high; too low
D) equal to the efficient price; too high

Question

Quizplus · Accepted Answer

When external benefits are present, the market price is too low because the supply curve does not take into account the positive consequences the good/service has on third parties. On the other hand, when external costs are present, the market price is too high because the demand curve does not reflect the negative effects the good/service has on third parties. Therefore, the most appropriate choice is C - too high for external costs and too low for external benefits.

When External Benefits Are Present, the Market Price Is ________