4. Explain graphically and verbally the nature of negative externalities. How and why does this create...
4. Explain graphically and verbally the nature of negative externalities. How and why does this create a situation that is not socially efficient? Can this be appropriately labeled ‘market failure’? Why or why not? Explain clearly.
Homework Answers
externalities lead to
inefficient allocation of resources because market prices do not
accurately reflect additional costs imposed on third parties.
This is not socially efficient as it does not account for the social costs and take into account only the production costs.
It is called a market failure as the equilibrium does not reflect true costs or benefits. It also leads to an increase in production of x than would be produced if we had included social costs leading to inefficient allocation.
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