Question

Governments may successfully intervene in competitive markets in order to achieve economic efficiencyA) at no time; competitive markets are always efficient without government intervention.B) to increase the incidence of positive externalities.C) in cases of positive externalities only.D) in cases of negative externalities only.E) in cases of both positive and negative externalities.

Answer 1

The correct answer is option E.

Explanation:

In a perfectly competitive market, the equilibrium is determined by the market forces of demand and supply. Though externalities, both positive and negative, can arise in the market. Externalities make the market inefficient.

The government can intervene in the market in case of both positive as well as negative externalities in order to achieve economic efficiency.