When there are market externalities, the market allocation of resources will not be optimal. Group of...

When there are market externalities, the market allocation of resources will not be optimal.

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True

False

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Expert Solution

Ans. True, when there are market externalities, the market allocation of resources will not be optimal because there will be overproduction of the good in case of a negative externality and there will be an underproduction of the good incase of a positive externality.

In case of a positive externality, the marginal social benefit exceeds the marginal private benefit but buyers and sellers while taking the decision for how much to buy/produce the good don't consider marginal social benefit but take their decisions by comparing marginal private benefit and marginal private cost. This leads to an output that is less than socially optimal level

In case of a negative externality, the marginal social cost exceeds the marginal private cost but decisions are made by comparing marginal private benefit and marginal private cost only. This leads to an output which is more than the socially optimal level.

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Rahul Sunny answered 1 year ago

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