When externalities are present, the socially optimal outcome occurs where the _____ benefit equals the _____ cost.

Question

Quizplus · Accepted Answer

When externalities are present, the market equilibrium does not lead to the socially optimal outcome. The external cost or benefit is not reflected in the market price, hence creating a divergence between private and social costs and benefits. The socially optimal outcome occurs where the marginal social benefit equals the marginal social cost, as this takes into account both the private and external costs and benefits. Therefore, Choice B, where the socially optimal outcome occurs where the marginal social benefit equals the marginal social cost, is the correct answer.

When Externalities Are Present, the Socially Optimal Outcome Occurs Where