Markets operate the most efficiently when external costs are maximized.

Question

Quizplus · Accepted Answer

Markets actually operate most efficiently when external costs are minimized or internalized. When external costs are not accounted for, it can lead to market failures such as overproduction of goods with negative externalities (e.g. pollution) and underconsumption of goods with positive externalities (e.g. vaccinations). By internalizing external costs, such as through taxes or regulations, the market can better reflect the true costs and benefits of production and consumption.

Markets Operate the Most Efficiently When External Costs Are Maximized