Final answer:
Externalities are costs or benefits resulting from economic activities. Examples include positive externalities, like pollution control, and negative externalities, such as pollution from manufacturing. Equilibrium price and quantity occur when supply and demand balance. Firms contribute to market failure by creating negative externalities.
Step-by-step explanation:
Externalities are the costs or benefits that result from an economic activity, but are not directly accounted for by the involved parties. Positive externalities occur when the activity generates benefits for third parties. For example, if a factory installs air pollution control equipment, it benefits the surrounding community by reducing pollution levels.
Negative externalities occur when the activity imposes costs on third parties. For instance, if a manufacturer emits pollutants into the air, it harms the environment and public health. Equilibrium price and quantity are the point where the supply and demand curves intersect, indicating the market's balance. At equilibrium, the quantity supplied equals the quantity demanded, and there is no tendency for prices to rise or fall.
Firms can contribute to market failure by creating negative externalities, such as pollution, that are not accounted for in their production costs. When firms do not bear the full social costs of their actions, market outcomes do not reflect true costs and benefits, leading to inefficient resource allocation and market failure.