In the presence of a “negative externality,” the free market would: Provide more than the efficient...

Question

Question

In the presence of a “negative externality,” the free market would:

Provide more than the efficient amount of the good

Provide less than the efficient amount of the good

Cause trade to take place at a price of $0

None of the above answers are correct

Answer 1

Answer #1

Option A.

Negative externalities refers to those actions of firms or Individuals persued for their own benefits but harms the third parties who were not involved in the transaction. For example pollution by firms affects the people who stay nearby.
These externalities are usually said to occur in free markets as these markets tend to ignore the third party effects. This will allow them to provide more than efficient amount of the good as they ignore effect's on third parties and are only concerned about maximizing their marginal benefits.

Answer 2

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