A negative externality occurs when marginal social costs exceed marginal private costs.

Question

Quizplus · Accepted Answer

A negative externality occurs when the cost of an economic activity that affects a third party is not reflected in the market price, leading to an inefficient allocation of resources. This means that the marginal social costs of the activity are higher than the marginal private costs incurred by the individual or firm engaging in the activity.

A Negative Externality Occurs When Marginal Social Costs Exceed Marginal