Industry conditions change because of which of the following factors related to externalities?

• A. The presence of social benefits and social costs that are not reflected in market prices
• B. Perfect competition among firms
• C. Fixed production technology
• D. Government subsidies for all industries

Answer: (A)

Verified step by step guidance

1. Understand the concept of externalities: Externalities occur when the actions of individuals or firms have effects on third parties that are not reflected in market prices. These effects can be either positive (social benefits) or negative (social costs).
2. Recognize that industry conditions change due to externalities when social benefits or social costs differ from private benefits or costs, causing market outcomes to be inefficient if left uncorrected.
3. Analyze each option in the context of externalities: Perfect competition and fixed production technology are market or production conditions but do not directly relate to externalities. Government subsidies may affect industries but are not the fundamental cause of externalities themselves.
4. Identify that the presence of social benefits and social costs not reflected in market prices is the key factor that changes industry conditions due to externalities, as it leads to market failures requiring intervention or adjustment.
5. Conclude that understanding how externalities cause divergence between private and social costs or benefits helps explain why industry conditions change and why markets may fail to allocate resources efficiently.