Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
Externalities cause actual output to equal socially optimal output
B
Externalities distort marginal benefits and costs, leading to sub-optimal output
C
Government intervention always corrects externalities to achieve optimal output
D
Externalities have no impact on resource allocation in the market
Understanding the Answer
Let's break down why this is correct
Answer
Externalities are costs or benefits that affect people who are not directly involved in a market transaction. When externalities are present, the actual output of goods or services may be higher or lower than what is considered socially optimal, which is the level of output that maximizes overall welfare. For example, if a factory produces goods but also pollutes the air, the pollution creates a negative externality that harms the surrounding community. As a result, the factory may produce more than the socially optimal amount because it does not take the pollution costs into account. To reach the socially optimal output, the market may need regulations or taxes to ensure that producers consider these external costs.
Detailed Explanation
Externalities change the benefits and costs for everyone involved. Other options are incorrect because Some might think that externalities make the actual output the same as the best output; It's a common belief that the government can always fix externalities.
Key Concepts
Socially Optimal Output
Externalities
Marginal Benefits and Costs
Topic
Socially Optimal Output vs. Actual Output
Difficulty
hard level question
Cognitive Level
understand
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