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In: Economics

To what extent do externalities cause inefficiencies in the production and consumption of goods and services?

To what extent do externalities cause inefficiencies in the production and consumption of goods and services?

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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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Rahul Sunny answered 8 months ago
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