Question

All externalities:

A. cause equilibrium prices to be too high.
B. cause equilibrium prices to be too low.
C. benefit producers at the expense of consumers.
D. cause markets to fail to allocate resources efficiently.

Answer 1

Option D

Cause markets to fail to allocate resources efficiently

Step-by-step explanation:

In economics, an externality refers to a cost or benefit to a third party who has no control over how that cost or benefit was created. They are both negative and positive externalities. Since both types of externalities are beyond the control of businesses, they make it difficult for the markets to allocate resources efficiently.

For example, if a cement manufacturer gets complaints about environmental pollution, and public safety, these are factors that are beyond his control and he cannot do anything about them. These are called negative externalities. He has to reduce his production activities.

Thus externalities removes some factors from being under the control of the business owners, making it difficult to allocate resources efficiently