Question

explain why most goods/services that bring about negative externalities are overproduced in the market. in your explanation, include the terms "social cost" and "private cost"

Answer 1

• Negative externalities refers to the negative actions of any firms or Individuals that indirectly impacts the third parties who were not directly involved in the transaction.
• When negative externalities are present within a market economy, social costs exceeds private costs.
• But to internalize these private costs, the firm's only consider these costs and overproduce within the market while ignoring the costs incurred by others.
• If they consider the social costs then their productivity will decrease, hence they ignore social costs during production and overproduce to internalize their private costs.