Final answer:
When a market faces externalities, competitive market outcomes may be inconsistent with ideal economic efficiency. Externalities occur when the supply or demand of a good or service creates costs or benefits for third parties that are not directly involved in the transaction. This is known as a market failure. The correct answer is option: c) competitive markets will generally achieve ideal economic efficiency.
Step-by-step explanation:
When a market faces externalities, competitive market outcomes may be inconsistent with ideal economic efficiency. Externalities occur when the supply or demand of a good or service creates costs or benefits for third parties that are not directly involved in the transaction. In such cases, the market fails to account for all social costs or benefits, resulting in an inefficient allocation of resources. This is known as a market failure.
For example, in the case of pollution, the market output leads to social costs of production exceeding social benefits to consumers. The market may produce too much of a polluting product because the negative external effects, such as health or environmental damages, are not factored into the market price.