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Homework answers / question archive / Externalities are called market failures because a

Externalities are called market failures because a

Marketing

Externalities are called market failures because

a. resource allocation decisions are incorrectly made with the externalities present.

b. if all costs are not paid by the producer, overproduction will occur.

c. if all benefits do not flow to the buyer of the product, underproduction will occur.

d. costs and/or benefits will go to people not involved in the transaction.

e. All of the above.

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The correct option is d. costs and/or benefits will go to people not involved in the transaction.

Explanation:

Externalities define the actions of a market participant that has an inverse or positive impact on society. Externalities lead to transfers of some proportion of the cost to other peoples who are not involved in the economic transaction, and it is the case of negative externalities. Similarly, the benefit of a transaction can be transferred to society when it is a positive externality.

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