Externalities exist because

Question

Quizplus · Accepted Answer

Externalities exist because private costs, which are the costs of an individual or firm, do not fully reflect the social costs, which include costs to others in society such as pollution or congestion. As a result, market outcomes can be inefficient and lead to a suboptimal allocation of resources. This is why externalities are considered market failures and can warrant government intervention to correct. Choice B is incorrect because if private costs were equal to social costs, there would be no externalities. Choice C is not necessarily true as externalities can arise from a variety of sources, including natural events. Choice D is not relevant to the concept of externalities.

Externalities Exist Because