Markets are often inefficient when negative externalities are present because
A)private costs exceed social costs at the private market solution.
B)externalities cannot be corrected without government regulation.
C)social costs exceed private costs at the private market solution.
D)production externalities lead to consumption externalities.

Question

Quizplus · Accepted Answer

When negative externalities exist, social costs will exceed private costs at the private market solution. This means that the market equilibrium does not account for the full cost of production, leading to an overproduction and consumption of goods with negative externalities. Government intervention through regulation, taxes, or subsidies can help to correct this market failure. Option A is incorrect because private costs are always lower than social costs at the market solution with negative externalities. Option B is incorrect because externalities can be corrected without government regulation through private solutions such as coase theorem or voluntary agreements. Option D is incorrect because production externalities and consumption externalities are separate concepts and do not necessarily lead to each other.

Markets Are Often Inefficient When Negative Externalities Are Present Because