If a negative externality exists, then there is a __________ when society produces the market output instead of the socially optimal output. This exists because the __________ to sellers and third parties are __________ the __________ derived by buyers.

Question

Quizplus · Accepted Answer

A negative externality exists when the production or consumption of a product imposes costs on third parties not involved in the market transaction. This leads to a net social cost because the costs to sellers and third parties (e.g., pollution from a factory affecting nearby residents) are greater than the benefits derived by buyers. This discrepancy results in the production of more of the good than is socially optimal, hence creating a net social cost.

If a Negative Externality Exists, Then There Is a __________