Final answer:
Negative externalities lead to overproduction and deadweight loss, while positive externalities result in underproduction and an inefficient market equilibrium. Government intervention can mitigate these inefficiencies by regulating negative externalities and subsidizing positive ones.
Step-by-step explanation:
Negative externalities, such as pollution from a power plant, result in costs not borne by the producer or consumer, creating an inefficient market outcome with a higher quantity than the socially optimal level.
This leads to a deadweight loss, where the total surplus of society is reduced, signifying resources that could have been better allocated, benefiting both consumers and producers. As a consequence of negative externalities, government intervention may be necessary to reduce production and align it with the efficient quantity, which in turn will address the deadweight loss.
On the other hand, positive externalities, like the additional benefits to society from an educated populace, often lead to a lower quantity produced than is socially beneficial. Because the full social benefits are not reflected in the market transactions, the market on its own does not produce enough of the good, also resulting in an inefficient market equilibrium. To combat this underproduction, governments often subsidize goods with positive externalities to encourage greater consumption and move closer to the socially optimal quantity.