When Markets Don't Align Self-Interest with Social Interest

question 40

Multiple Choice

When markets don't align self-interest with social interest:

• A) markets will still manage to reach an efficient outcome.
• B) governments may improve the situation by changing incentives.
• C) societal costs will always exceed individual benefits.
• D) individual benefits will exceed societal benefits.

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Definitions:

Coase Theorem

Under certain conditions, when externalities are present, private parties can arrive at the efficient solution without government involvement.

External Cost

External cost is a cost incurred by a third party who did not agree to the action that caused the cost, often seen in pollution or other forms of environmental impact.

MC

An abbreviation commonly used for "Marginal Cost," which refers to the additional cost incurred by producing one more unit of a good or service.

Liability Rule

A legal principle that allocates the economic burden of damages to the party responsible for causing harm.