When There Is an Externality in a Market

question 214

Multiple Choice

When there is an externality in a market,

• A)the externality will move the market to an economically efficient equilibrium.
• B)the externality will cause the market price to be less than or greater than the equilibrium price.
• C)the government should use price controls to enable the market to reach equilibrium.
• D)government intervention may increase economic efficiency.

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Definitions:

Initial Endowment

The initial quantity of goods, services, or resources an individual, firm, or economy possesses.

Pareto Efficient

A state of allocation where it is impossible to make any one individual better off without making at least one individual worse off.

Utility Function

A mathematical representation that ranks the preferences of an individual consumer for different bundles of goods.

Initial Endowment

The original allocation of resources, including assets and goods, available to an individual or entity at the start of an economic analysis.