When a marginal external cost exists, the market produces an amount that is greater than the efficient amount.

Question

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When a marginal external cost exists, the market fails to account for this cost, and therefore produces an amount that exceeds the socially efficient level. This is because the external cost is not borne by the producers or consumers, but by third parties or society at large, leading to what is known as market failure.

When a Marginal External Cost Exists, the Market Produces an Amount