Externalities can cause the market mechanism to
A)malfunction.
B)improve.
C)operate efficiently.
D)move up toward the production possibility curve.

Question

Quizplus · Accepted Answer

Externalities, whether positive or negative, can cause market failure by resulting in overproduction or underproduction. This is because actions of one economic agent affect the welfare or utility of others, but the market mechanism does not factor in these external effects into the price or quantity of exchange. As a result, the market fails to allocate resources efficiently and the outcome may not be socially optimal.

Externalities Can Cause the Market Mechanism to