The existence of externalities is due mainly to the fact that
A) monopolies tend to produce too little of a good anyway.
B) the optimal level of pollution is zero.
C) pollution is not a serious problem.
D) property rights are poorly defined.

Question

Quizplus · Accepted Answer

Externalities occur when the costs or benefits of a transaction are borne by someone other than the buyer or the seller. This happens because property rights are not well-defined, which means that individuals and firms can pollute without bearing the full cost of their pollution. For example, a factory may dump waste into a river, which damages the health of people downstream, but the factory does not pay for the damage it causes. If property rights were well-defined, the factory would have to pay for the cost of cleaning up the pollution, or for compensating the downstream residents for the harm caused. Thus, the existence of externalities is due to poorly defined property rights.

The Existence of Externalities Is Due Mainly to the Fact