In the absence of externalities, which of the following statements is true regarding the relationship between private and social costs and benefits?

• A. Private costs and benefits are equal to social costs and benefits.
• B. Social benefits are unrelated to private benefits.
• C. Social costs always exceed private costs.
• D. Private benefits are always less than social benefits.

Answer: (A)

Verified step by step guidance

1. Understand the definitions: Private costs and benefits refer to the costs and benefits experienced directly by the individual or firm involved in a transaction, while social costs and benefits include both private costs/benefits and any external costs/benefits imposed on or received by third parties.
2. Recall the concept of externalities: Externalities occur when a transaction affects third parties who are not directly involved, causing social costs or benefits to differ from private ones.
3. Analyze the condition 'in the absence of externalities': This means there are no external costs or benefits affecting third parties, so the private and social measures should align.
4. Formulate the relationship mathematically: Since there are no externalities, social cost equals private cost, and social benefit equals private benefit, which can be expressed as \(\text{Social Cost} = \text{Private Cost}\) and \(\text{Social Benefit} = \text{Private Benefit}\).
5. Conclude that under these conditions, the statement 'Private costs and benefits are equal to social costs and benefits' is true, while the other options imply the presence of externalities or differences that do not exist here.