When considering externalities, companies should be aware that social costs and social benefits may differ from private costs and private benefits because:

• A. Externalities can cause the market outcome to be inefficient, as not all costs or benefits are reflected in market prices.
• B. Private costs and benefits always account for all effects on society.
• C. Externalities only affect government policy, not market outcomes.
• D. Social costs and social benefits are always equal to private costs and private benefits.

Answer: (A)

Verified step by step guidance

1. Step 1: Understand the definitions of private costs and private benefits. Private costs are the costs borne directly by the producer or consumer involved in a transaction, while private benefits are the gains they receive from that transaction.
2. Step 2: Define social costs and social benefits. Social costs include both private costs and any external costs imposed on third parties, while social benefits include private benefits plus any external benefits to others.
3. Step 3: Recognize what externalities are. Externalities occur when a transaction affects third parties who are not directly involved, causing a difference between private and social costs or benefits.
4. Step 4: Analyze how externalities lead to market inefficiency. Because private costs or benefits do not reflect the full social costs or benefits, market prices fail to signal the true cost or value, leading to overproduction or underproduction.
5. Step 5: Conclude that the presence of externalities means social costs and benefits differ from private ones, which can cause market outcomes to be inefficient unless corrected by policy or other mechanisms.