When a firm ignores external costs:

Question

Quizplus · Accepted Answer

When a firm ignores external costs, it does not factor in the costs imposed on society and therefore the good is priced too cheaply in equilibrium. This is because the firm is not paying for the full cost of production and as a result, is willing to produce more of the good than what is socially optimal. This leads to an excess of the good being produced and consumed, which can harm society in the long-run. Ignoring external costs also means that the firm is not taking into account the negative effects it may be causing to the environment or other individuals, leading to market failure.

When a Firm Ignores External Costs