Governments can improve market outcomes for which of the following situations?

• A. Markets where private solutions are always effective
• B. Markets affected by externalities
• C. Perfectly competitive markets with no externalities
• D. Markets with complete information and no market failures

Answer: (B)

Verified step by step guidance

1. Understand the concept of externalities: Externalities occur when a market transaction affects third parties who are not directly involved in the transaction, leading to market failures.
2. Recognize that in perfectly competitive markets with no externalities or market failures, private solutions are typically efficient and government intervention is unnecessary.
3. Identify that markets with complete information and no market failures also tend to allocate resources efficiently without government interference.
4. Focus on markets affected by externalities, where private solutions often fail to achieve socially optimal outcomes due to costs or benefits not reflected in market prices.
5. Conclude that government intervention, such as taxes, subsidies, or regulations, can improve market outcomes by internalizing externalities and correcting market failures.