Question

If people don't take account of the external costs of their actions, what happens?

a) Nothing happens; external costs are irrelevant.
b) Market forces automatically correct for external costs.
c) Negative externalities may lead to overproduction and inefficiency.
d) Positive externalities may lead to underproduction and inefficiency.

Answer 1

If people ignore external costs, it can result in market failure through overproduction and inefficiency due to negative externalities, or underproduction and inefficiency due to positive externalities.

Step-by-step explanation:

When people do not take into account the external costs of their actions, such as environmental damages from pollution, negative externalities can lead to market failure. This occurs because market prices do not reflect the social cost, leading to overproduction and inefficiency, which can be seen when private markets produce more than what would be socially optimal due to these unaccounted costs. In contrast, positive externalities may cause underproduction and inefficiency because the market output is less than the socially optimal level, due to suppliers not being compensated for the additional benefits they provide to others.