ECONOMICS
COMPETITION AND MARKET STRUCTURES
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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They provide public goods.
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They lead to higher price.
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Their costs and benefits are not reflected in the market prices paid by buyers and sellers (or the demand and supply model).
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They cause imperfect competition.
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Detailed explanation-1: -Externalities lead to market failure because a product or service’s price equilibrium does not accurately reflect the true costs and benefits of that product or service.
Detailed explanation-2: -These spillover costs and benefits are called externalities. A negative externality occurs when a cost spills over. A positive externality occurs when a benefit spills over. So, externalities occur when some of the costs or benefits of a transaction fall on someone other than the producer or the consumer.
Detailed explanation-3: -Externalities are called market failures because the equilibrium price set for the product causing externality does not reflect the actual cost or benefit the other party incurs, which results in an inefficient allocation of resources.
Detailed explanation-4: -Positive externalities refer to benefits caused by one entity to another, without being paid for it. Whereas Negative externalities refer to the harms caused by one entity to another without being penalized for it.