Why does the presence of negative externalities lead to a misallocation of societal resources?
A) because whenever external costs are imposed on outside parties, the good should not be produced at all
B) because the government always intervenes in markets when negative externalities are present
C) because less of the good than is ideal for society is produced
D) because there are some costs associated with production that the producer fails to take into consideration

Question

Quizplus · Accepted Answer

Negative externalities occur when the production or consumption of a good imposes costs on third parties that are not reflected in the market prices. This means that the producer does not bear all the costs of production, leading to overproduction of the good from society's perspective. The market fails to allocate resources efficiently because the social cost of production is higher than the private cost borne by the producer.

Why Does the Presence of Negative Externalities Lead to a Misallocation