The existence of externalities in a market implies that:

Question

Quizplus · Accepted Answer

Externalities refer to the costs or benefits that are not reflected in the market price of a good or service, therefore resources are not being allocated efficiently. If resources were being used in their highest valued activity, all costs and benefits would be included in the market price. Therefore, D is the correct answer. A, B, C, and E are incorrect because they assume efficient markets, which is not the case in the presence of externalities.

The Existence of Externalities in a Market Implies That