In markets with externalities, the invisible hand concept does not work in society's best interest.

Question

Quizplus · Accepted Answer

Markets with externalities, such as pollution or traffic congestion, create costs or benefits for individuals or groups that are not reflected in market prices. As a result, the allocation of resources by market forces alone may not be optimal for society as a whole. This is because the invisible hand of the market fails to take into account the social costs or benefits associated with the externality, leading to market failure. Therefore, government intervention may be necessary to address externalities and promote socially optimal outcomes.

In Markets with Externalities, the Invisible Hand Concept Does Not