In a market, the presence of an external cost causes the market equilibrium output to exceed the efficient level of output.

Question

Quizplus · Accepted Answer

When there is an external cost, such as pollution or congestion, the market equilibrium output does not take into account the full social cost of production. As a result, the market equilibrium output is higher than the efficient level of output, which would take into account the external cost. This is known as a market failure.

In a Market, the Presence of an External Cost Causes