Externalities cause markets to

Question

a. fail to allocate resources efficiently.
b. cause price to be different than the equilibrium price.
c. benefit producers at the expense of consumers.
d. cause markets to operate more equitably.

I think the answer is a)??

I agree

but b seems right too, because it will cause price to be different, won't it?

b) I don't believe is right. The market with the externality will have an equilibrium price. While this price will be different than the socially optimum price, the price will be in equilibrium. (Barring any changes in tastes, technology, etc, any fluxuations in prices will cause an imbalance between Q supplied and Q demanded -- eventually the price settle back to the equilibrium price)

Answer 1

You are correct in choosing answer a. Externalities cause markets to fail to allocate resources efficiently. While externalities can potentially influence price, the key issue that arises from externalities is the inefficiency in resource allocation, which makes option a the most accurate answer. As explained, the market will still have an equilibrium price despite the presence of externalities.