Private markets fail to account for externalities because
A)externalities don't occur in private markets.
B)sellers include costs associated with externalities in the price of their product.
C)decisionmakers in the market fail to include the costs of their behavior to third parties.
D)the government cannot easily estimate the optimal quantity of pollution.

Question

Quizplus · Accepted Answer

Private markets fail to account for externalities because decisionmakers in the market fail to include the costs of their behavior to third parties. Externalities occur when the actions of one economic agent affect the well-being of others in a way that is not captured by market prices. In other words, the cost or benefit of an activity is not fully borne by the person or firm engaged in that activity. As a result, private markets fail to allocate resources efficiently and may lead to over-consumption or under-production of certain goods or services.

Private Markets Fail to Account for Externalities Because