The efficient way to deal with an external cost is to let markets allocate resources without government intervention.

Question

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External costs, or externalities, are costs of a transaction that affect third parties who did not choose to incur that cost. Markets often fail to account for these costs on their own, leading to overproduction or overconsumption of the product causing the externality. Government intervention, such as taxes, subsidies, or regulations, can help internalize these external costs, making the market outcome more efficient and equitable.

The Efficient Way to Deal with an External Cost Is