The price system allocates resources efficiently EXCEPT when
A) consumers decide they want more of a good.
B) resources are utilized to produce the highest-valued goods and services.
C) voluntary exchange exists.
D) the production of a good affects parties other than its buyers and sellers.

Question

Quizplus · Accepted Answer

When the production of a good affects parties other than its buyers and sellers, it creates externalities. Externalities are not taken into account by the price system, so the allocation of resources may not be efficient. For example, the production of a good may have negative effects on the environment or public health, which are not reflected in the price of the good. In such cases, market failure occurs and alternative solutions (such as regulation or taxation) may be necessary to achieve efficiency.

The Price System Allocates Resources Efficiently EXCEPT When