Externalities are a type of market failure because:

Question

Quizplus · Accepted Answer

Externalities occur when the costs or benefits of a market activity are not fully reflected in the price of the good or service being exchanged, and are instead borne by third parties who are not part of the transaction. This leads to market failure, as the market fails to allocate resources efficiently. Both options A and D may also contribute to market failure, but are not specific to externalities. Option B is incorrect, as it is not relevant to the concept of externalities.

Externalities Are a Type of Market Failure Because