The similarity between markets for common resources and markets with externalities is that:
A) the equilibrium quantity is too high in terms of society.
B) the price that competitive firms charge does not capture the true costs and benefits of consumption.
C) government involvement is needed to reach an efficient outcome.
D) generally we get an oversupply at market.

Question

Quizplus · Accepted Answer

In both markets for common resources and markets with externalities, the price that competitive firms charge does not capture the true costs and benefits of consumption. In the case of common resources such as air or water, the price charged does not reflect the true cost of depleting or polluting the resource. In the case of externalities such as pollution or noise, the price does not reflect the true cost to society of the negative impact on people's health or well-being. Both markets thus result in inefficient outcomes as the price signals do not account for all the costs and benefits.

The Similarity Between Markets for Common Resources and Markets with Externalities