Question

To model these environmental externalities, the relevant market must be defined as the good whose production or consumption generates environmental damage outside the market transaction. What is the purpose of defining the relevant market in this way?

a) To minimize government intervention.
b) To encourage more free ridership.
c) To accurately account for the external costs of production or consumption.
d) To boost private profits.

Answer 1

The purpose is to accurately account for the external costs of production or consumption to address market failure and ensure all social costs are considered.

Step-by-step explanation:

The purpose of defining the relevant market to include environmental externalities, such as pollution, is c) To accurately account for the external costs of production or consumption. This is essential for addressing market failure, where the private market does not achieve efficient output. When externalities are present, the supply curve does not reflect all social costs, just a subset, leading to a discrepancy between private costs and societal costs. In pollution's case, without accounting for these external costs, the market may produce too much of the polluting product, resulting in social costs of production exceeding the social benefits to consumers. Therefore, defining the market to consider these costs is critical to understand the full impact of production and consumption on society and the environment.