In: Economics
To what extent do externalities cause inefficiencies
in the production and consumption of goods and services?
Answer:
An externality is defined as a cost or benefit that generates from
the production and consumption of goods or services of various
natures.
Externalities cause inefficiencies in the production and
consumption of goods and services and hence affect the market
equilibrium as well which intern creates market failure. A market
failure arises due to externalities if equilibrium prices of goods
and services at which supplier and consumer do the transaction does
not denote the accurate value of goods and services.
When negative externalities are present in the economy it means
producers don't have to bear all the costs which result in excess
of production. If negative externalities is properly taken into
account than, cost would be higher which result in decrease of
production and more efficient equilibrium.
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