Why are externalities referred to as "market failures?" Does the market system actually encourage this behavior? Identify two possible solutions to externalities

Externalities are market failures because both positive and negative bring a negative outcome at some point. The market system discourages externalities because it leads to misallocation of funds and is cost inefficient. For example, when a company spills oil in a river it does not consider the fact that the people around will have to start buying water since they cannot consume the already polluted water.

Solutions to externalities include;

1. Internalizing third party costs. A company can adopt some measures to eliminate cases of pollution like developing a drainage system to avoid spillage in water bodies.
2. The imposition of taxes. The government can impose tax on the items leading to the externality for example if a leather tanning industry is causing air pollution the government can impose a tax on the leather.