Question

Keep in mind that sometimes private solutions to externalities are not achieved. For instance, this could occur when communication barriers or social customs are important enough relative to the potential gains involved that:

Option 1: Individuals prioritize personal interests over collective benefits.
Option 2: Government interventions are universally favored.
Option 3: Market forces efficiently address externalities.
Option 4: Cultural factors hinder effective resolution.

Answer 1

When externalities exist, the private market fails to achieve an efficient output. Private solutions may not be achieved due to various factors such as individual priorities and cultural factors.

Step-by-step explanation:

When externalities exist, the interaction of demand and supply no longer coordinates all social costs and benefits. This is known as market failure, where the private market fails to achieve an efficient output because it does not consider all costs and benefits. In the case of pollution, for example, the social costs of production exceed the social benefits to consumers, resulting in an overproduction of the product. Private solutions to externalities may not be achieved due to factors such as individuals prioritizing personal interests over collective benefits or cultural factors hindering effective resolution.