A plausible example of market failure due to an externality is
A)the cost of building new highways outside of major cities.
B)the despoiling of rivers and lakes by nitrogen run-off from agricultural fertilizers.
C)the high salaries enjoyed by professional athletes.
D)the line-ups at the theatre when a good movie is playing.
E)a farmer with an apple orchard who also keeps bees.

Question

Quizplus · Accepted Answer

The despoiling of rivers and lakes by nitrogen run-off from agricultural fertilizers is an example of market failure due to an externality. The farmers who use the fertilizers do not pay for the cost that is imposed on the public for the polluted waters. The negative impact on the environment is not reflected in the price of the product or service, which is an externality. This leads to resource allocation inefficiency, as the market not efficiently allocating resources to minimize costs to those affected by the externality.

A Plausible Example of Market Failure Due to an Externality