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

Question

Quizplus · Accepted Answer

Externalities can cause markets to fail and lead to inefficient outcomes. Private solutions to externalities can arise through voluntary agreements, property rights and other mechanisms. However, when private solutions fail to emerge or are inadequate, government intervention may be needed to address the externalities and move the market closer to a socially optimal outcome. Positive production externalities may require government subsidies or provision of public goods, while negative externalities may require taxes, regulations or tradable permits.

Externalities Tend to Keep Markets from Reaching a Socially Optimal