When significant externalities exist:
I. the market equilibrium is no longer efficient.
II. the market equilibrium is only efficient if the externality is an external benefit.
III. social surplus is not maximized.
IV. the government may increase efficiency by imposing a tax on the market.
A) I only
B) II and IV only
C) I and III only
D) II, III, and IV only

Question

Quizplus · Accepted Answer

When significant externalities exist, the market equilibrium is not efficient because it does not account for the external costs or benefits, leading to a failure in maximizing social surplus.

When Significant Externalities Exist