Externalities prevent the market mechanism from achieving the optimal rate of pollution.

Question

Quizplus · Accepted Answer

Externalities are the costs or benefits that are not reflected in the market price of a good or service. In the case of pollution, the costs of pollution (such as health problems, environmental damage, etc.) are not paid by the polluters or reflected in the price of the product. As a result, the market mechanism does not take into account the full cost of producing and consuming goods that result in pollution, leading to an overproduction of pollution beyond the optimal level.

Externalities Prevent the Market Mechanism from Achieving the Optimal Rate