Producing where P = MC does not yield an optimal distribution of resources when externalities are present because
A) neither price nor marginal cost reflect the social costs or social benefits of production and consumption; that is, the costs and benefits to society
B) while price still accurately measures benefits, marginal cost no longer measures the cost of resources to society
C) while marginal cost accurately measures cost, price no longer measures the true social value of the goods produced
D) output would always be higher than optimal
E) output would always be lower than optimal

Question

Quizplus · Accepted Answer

A) is correct because when externalities are present, neither the price nor the marginal cost accurately reflect the true social costs or benefits of production and consumption. This discrepancy leads to a suboptimal distribution of resources.

Producing Where P = MC Does Not Yield an Optimal