What is market equilibrium and how do externalities create deviations from it in environmental markets?

• A. Equilibrium is price equals marginal cost; externalities do not affect equilibrium.
• B. Equilibrium is where quantity supplied equals quantity demanded; externalities cause social costs/benefits not reflected in price, leading to overuse (negative) or underuse (positive).
• C. Equilibrium is when government sets quantity; externalities always improve efficiency.
• D. Equilibrium occurs when supply exceeds demand.

Answer: (B)