When a market produces an externality, how effective are free market solutions?

Show Answers

They increase producer gains to the highest levelThey lead to optimal efficiencyThey fail to achieve efficiencyThey ensure fairness in outcomesThey guarantee maximum social welfare

Explanation

Free market solutions tend to be inefficient when externalities are present because the market fails to account for the external costs or benefits imposed on third parties, leading to suboptimal outcomes.