Question

Knowing that the presence of externalities reduces surplus, it implies that:______

Answer 1

Externalities reduce the surplus in an economic market, resulting in a loss of social surplus known as deadweight loss.

Step-by-step explanation:

The presence of externalities reduces surplus in an economic market. Externalities are costs or benefits that are not reflected in the price of a good or service and can affect individuals or society as a whole. When externalities exist, the market fails to achieve an efficient outcome, resulting in a loss of social surplus. This loss, known as deadweight loss, represents a situation where resources are not allocated optimally and society is worse off. Externalities are considered an example of market failure because they disrupt the coordination of social costs and benefits in the interaction of demand and supply.