Homework Answers
Solution: When there are no externalities, a competitive market achieves economic efficiency. If there is a negative externality, economic efficiency will not be achieved because:
a) too much of the good will be produced
Explanation:
Negative externality are the expenses borne as a result of some economic event or transaction.
In negative externality, all costs are not paid by the producer which leads to overproduction or excessive production of a good. When all the costs are taken into account, the prices of good is much higher and less people consume it as demand decreases. Whereas in positive externality, too little of the good is produced as production is decreased.
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