Question

Which of the following is true about externalities? Externalities represent a source of market failure. Externalities may be positive or negative. The presence of an externality is one reason the gove

Answer 1

Externalities represent a case where markets fail to consider all social costs, leading to market failure. This can occur when the private market does not account for all costs incurred in production or all benefits obtained by consumers.

Step-by-step explanation:

Externalities represent a case where markets no longer consider all social costs, but only some of them. Due to this, economists commonly refer to externalities as an example of market failure. When there is market failure, the private market fails to achieve an efficient output because firms do not account for all costs incurred in production or consumers do not account for all benefits obtained.

In the case of pollution, at the market output, social costs of production exceed social benefits to consumers, and the market produces too much of the product.