Question

Assuming the Coase Theorem does not apply, a free market with externalities ______ social surplus.

Answer 1

When externalities exist and the Coase Theorem does not apply, a free market will result in a reduction of social surplus.

Step-by-step explanation:

When externalities exist and the Coase Theorem does not apply, a free market will result in a reduction of social surplus. This is because the market fails to consider all the social costs and benefits, leading to an inefficient allocation of resources. In the case of pollution, for example, the social costs of production exceed the social benefits to consumers, resulting in too much pollution being produced.