Externalities exist because

Question

Quizplus · Accepted Answer

Externalities occur when the private costs incurred by producers or consumers do not fully reflect the social costs or benefits of their actions. In other words, private costs differ from social costs, which leads to market inefficiencies and suboptimal outcomes. For example, if a factory pollutes a river, the private cost of production is lower than the social cost of the polluted river, which affects people downstream who may not have any relationship with the factory. As a result, externalities may require government intervention or other corrective mechanisms to internalize the costs or benefits of the activity.

Externalities Exist Because