A characteristic of a competitive free market is that, if external costs exist, they:
A) enable the market to allocate resources efficiently.
B) are reflected by the total market supply curve.
C) are not reflected by the total market supply curve.
D) are reflected by the total market demand curve.

Question

Quizplus · Accepted Answer

External costs refer to costs imposed on third parties who are not involved in the transaction. In a competitive free market, the market supply and demand curves only reflect the costs and benefits to the buyers and sellers who are directly involved in the transaction. External costs are not reflected in the total market supply curve, which means that the market will not allocate resources efficiently in the presence of external costs. Therefore, choice C is the correct answer.

A Characteristic of a Competitive Free Market Is That, If