Final answer:
Market externalities disrupt the optimal allocation of resources, leading to market failure where social costs and benefits are not balanced. This can result in overproduction or underproduction of a good or service, necessitating market interventions to correct the inefficiency. Perfect competition, on the other hand, achieves both productive and allocative efficiency in the absence of externalities.
Step-by-step explanation:
When considering if market externalities lead to optimal allocation of resources, it's important to understand the concept of market failures. In an ideal scenario without externalities, such as a wheat market, equilibrium is both efficient and socially optimal. However, externalities can disrupt this balance by including additional costs or benefits not reflected in the market price, leading to either overproduction or underproduction of a good or service. For example, pollution is a negative externality that imposes additional social costs, resulting in overproduction relative to the socially optimal output.
In the case of market failure, the market by itself cannot allocate resources efficiently to balance social costs and benefits. An external market intervention, such as a marketable permit program, might be required to correct this inefficiency. In a perfectly competitive market, in contrast, where firms and consumers maximize profits and utility respectively, the market achieves both productive and allocative efficiency, providing the maximum satisfaction to society. Therefore, when market externalities are present, the market allocation of resources will not be optimal without intervention.