ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -19. When externalities exist, what do buyers and sellers do and how do their actions affect market equilibrium? a. They neglect the external effects of their actions, but the market equilibrium is still efficient.

Detailed explanation-2: -A negative externality exists when a cost spills over to a third party. A positive externality exists when a benefit spills over to a third-party. Government can discourage negative externalities by taxing goods and services that generate spillover costs.

Detailed explanation-3: -Externalities pose fundamental economic policy problems when individuals, households, and firms do not internalize the indirect costs of or the benefits from their economic transactions. The resulting wedges between social and private costs or returns lead to inefficient market outcomes.

Detailed explanation-4: -Firms can cause externalities when producing goods that will be sold in the market. This is known as production externalities. Individuals can also produce externalities when consuming goods. We refer to these externalities as consumption externalities.