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Externalities: Market Effects & Societal Impacts
Chapter 3, Problem 1(choose chapter or problem)
Questions & Answers
QUESTION: What are externalities? Use a supply-and-demand analysis to show how a negative or positive externality prevents a perfectly competitive market from achieving efficiency.
ANSWER:Step 1 of 2
Externalities refer to the unintended effects of a market transaction on parties not directly involved in the transaction. These effects can be positive or negative and occur when the production or consumption of a good or service impacts the well-being of individuals or entities outside the market exchange. The market is in equilibrium when marginal benefit (demand) equals marginal cost. Externality leads to market failure because the cost or benefit of externality is not reflected in the prices.
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Externalities: Market Effects & Societal Impacts
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Explore the concept of externalities, the unintended market effects impacting third parties. Through examples of pollution and neighborhood beautification, understand how externalities can lead to market inefficiencies. Discover interventions, like taxes and subsidies, designed to align private and social costs.