Since externalities tend to keep markets from reaching a socially optimal equilibrium,when is government action needed
A)It is always needed, because private solutions can never be attained.
B)It is needed when private solutions fail to arise.
C)It will be needed only to correct for positive externalities.
D)It will be needed only to compensate consumers.

Question

Quizplus · Accepted Answer

Government action is needed when private solutions fail to arise because externalities disrupt efficiency in the market. When parties are unable to internalize externalities, government intervention in the form of regulation or taxes may be necessary to achieve a socially optimal equilibrium. However, it is not always the case that government intervention is needed for all externalities, and compensation for consumers or correction of positive externalities may not always be required.

Since Externalities Tend to Keep Markets from Reaching a Socially