Which of the following best describes a situation where individually rational behavior results in a collectively inefficient outcome due to externalities?

• A. The tragedy of the commons
• B. A public good being provided by the government
• C. Perfect competition in a market with no externalities
• D. A monopolist maximizing profit

Answer: (A)

Verified step by step guidance

1. Understand the concept of externalities: Externalities occur when an individual's actions have effects (positive or negative) on others that are not reflected in market prices.
2. Recognize that individually rational behavior means each person acts to maximize their own benefit without considering the impact on others.
3. Identify that a collectively inefficient outcome happens when the sum of individual actions leads to overuse or depletion of a shared resource, harming the group as a whole.
4. Recall that the 'tragedy of the commons' is a classic example where individuals overuse a common resource because they do not bear the full cost of their actions, leading to inefficiency.
5. Compare the other options: public goods provided by government, perfect competition without externalities, and monopolist profit maximization do not typically illustrate this specific problem of externality-driven collective inefficiency.