Question

When negative externalities exist, is the market outcome (EP and EQ) efficient from society’s point of view? Do private markets tend to produce too much or too little of products that create negative externalities?

Answer 1

When negative externalities exist, the market outcome is not efficient from society's point of view. Private markets tend to produce too much of products that create negative externalities.

Step-by-step explanation:

When negative externalities exist, the market outcome is not efficient from society's point of view. Private markets tend to produce too much of products that create negative externalities.

A negative externality occurs when the production or consumption of a good imposes costs on third parties. For example, pollution from a factory negatively affects the health and well-being of nearby residents.

In the case of negative externalities, the market equilibrium does not take into account the costs imposed on society. As a result, private markets tend to overproduce goods that create negative externalities, leading to an inefficient allocation of resources.