Both positive externalities and negative externalities produce inefficiency.

Question

Quizplus · Accepted Answer

Both positive and negative externalities cause market inefficiency by creating a divergence between private and social costs or benefits, leading to an inefficient allocation of resources. In the case of positive externalities, the market tends to underproduce the good or service that generates the external benefit, while in the case of negative externalities, the market tends to overproduce the good or service that generates the external cost. Both situations result in deadweight loss and inefficiency.

Both Positive Externalities and Negative Externalities Produce Inefficiency