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Question & Answer
Choose the Best Answer
Externalities always lead to market failure, requiring government intervention.
Social optimum occurs when marginal social cost equals marginal social benefit.
Private costs are always aligned with social costs in the presence of externalities.
Addressing externalities can lead to an increase in overall social welfare.
The existence of positive externalities can justify government subsidies.
Understanding the Answer
Let's break down why this is correct
A social optimum is reached when the extra benefit from a good equals the extra cost to society, so the marginal social benefit must equal the marginal social cost. Other options are incorrect because The idea that every externality forces a government fix is a common mistake; People often think private costs and social costs always match, but externalities create a gap.
Key Concepts
Externalities and Social Optimum
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Deep Dive: Externalities and Social Optimum
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Definition
Externalities occur when the marginal social benefit or cost of a good differs from the private benefit or cost. The socially optimal output level accounts for externalities, aiming to align production with maximum social welfare by considering all costs and benefits. Understanding externalities is crucial to address market inefficiencies and achieve overall welfare maximization.
Topic Definition
Externalities occur when the marginal social benefit or cost of a good differs from the private benefit or cost. The socially optimal output level accounts for externalities, aiming to align production with maximum social welfare by considering all costs and benefits. Understanding externalities is crucial to address market inefficiencies and achieve overall welfare maximization.
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