When there is an externality in a market,
A)the externality will move the market to an economically efficient equilibrium.
B)the externality will cause the market price to be less than or greater than the equilibrium price.
C)the government should use price controls to enable the market to reach equilibrium.
D)government intervention may increase economic efficiency.

Question

Quizplus · Accepted Answer

When there is an externality in a market, there is a divergence between private and social costs or benefits, which results in market inefficiencies. Government intervention, such as taxes, subsidies, or regulations, may align private incentives with social goals, leading to a more efficient outcome. Therefore, the best choice is D. Options A and C are incorrect because the presence of an externality can prevent the market from reaching an economically efficient equilibrium, and price controls may exacerbate the problem. Option B is not necessarily correct because it depends on the type and magnitude of the externality.

When There Is an Externality in a Market