ECONOMICS
MARKET FAILURES
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The uncompensated impact of one person’s actions on the well-being of a bystander.
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An uncompensated cost that an individual or firm imposes on others.
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A benefit that an individual or firm confers on others without receiving compensation.
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None of the above
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Detailed explanation-1: -An externality refers to the uncompensated impact of one person’s actions on the well-being of a bystander. Externalities cause markets to be inefficient, and thus fail to maximize total surplus. When the impact on the bystander is adverse, the externality is called a negative externality.
Detailed explanation-2: -A positive externality exists if the production and consumption of a good or service benefits a third party not directly involved in the market transaction. For example, education directly benefits the individual and also provides benefits to society as a whole through the provision of more…
Detailed explanation-3: -Light pollution is an example of an externality because the consumption of street lighting has an effect on bystanders that is not compensated for by the consumers of the lighting.
Detailed explanation-4: -When the activities of one result in harm to others with no payment made for the harm done, such activities are called negative externalities, e.g. factories produce goods but at the same time create water and air pollution. Production of goods increases welfare but at the same time pollution reduces the welfare.
Detailed explanation-5: -There are four main types of externalities: positive production, positive consumption, negative consumption, and negative production.