Question

Why are externalities referred to as “market failures?” Does the market system actually encourage this behavior? Identify two possible solutions to externalities.

Answer 1

Externalities refer to both the unprecedented benefit and cost. When the externality caused results in cost, it is termed as a market failure.

Step-by-step explanation:

Externality is when a business or an individual is benefited by something or has to pay a cost for something that he didn't do. Externalities are unprecedented and can result in both profit and loss. These are mostly due to the economic policies framed and implemented by the government.