It is true of externalities that they

Question

Quizplus · Accepted Answer

Externalities can cause the price system to misallocate resources, as they occur when the production or consumption of a good or service affects the well-being of a third party who is not directly involved in the transaction. These effects can be positive or negative, but in either case, they result in a divergence between the private costs or benefits of the individuals involved in the transaction and the social costs or benefits of that activity. The market system fails to account for these external costs or benefits, and may result in overproduction or underproduction of the goods or services that generate them.

It Is True of Externalities That They