What are external effects (externalities) and why can they lead to inefficiency and government intervention in the market? Why are some government policies to manage externalities effective (efficient) while others are ineffective (inefficient)?

Marketing Dec 28, 2020

Expert Solution

In the negative externality, the cost of creating an externality is borne by the third party who is not involved in the transaction of an individual who is creating an externality. The government imposes taxation in such a way that efficient outcomes can be achieved.

In the positive externality, the benefit is gain by the third party who is not involved in the transaction of an individual who is creating an externality. The government provides the subsidy in such a way that efficient outcomes can be achieved.

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