In the context of externalities, what is the typical effect of free trade among countries on the prices of goods?

• A. It causes prices to fluctuate unpredictably without any long-term trend.
• B. It raises prices due to increased transportation costs.
• C. It keeps prices unchanged because supply and demand remain constant.
• D. It generally lowers prices by increasing competition and efficiency.

Answer: (D)

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.
2. Recognize that free trade allows countries to specialize in producing goods where they have a comparative advantage, leading to more efficient production overall.
3. Analyze how increased competition from free trade affects prices: More competition typically drives prices down as producers strive to attract consumers.
4. Consider the role of efficiency gains: Free trade often leads to lower production costs and better resource allocation, which also contributes to lowering prices.
5. Conclude that, in the presence of externalities, free trade generally results in lower prices for goods due to increased competition and improved efficiency, rather than causing unpredictable fluctuations or price increases.