Explain why externalities prevent the attainment of efficiency, when goods are traded in competitive markets

Marketing Jan 13, 2021

Explain why externalities prevent the attainment of efficiency, when goods are traded in competitive markets.

Expert Solution

An externality is the cost or benefit that affects a third-party that did not incur the cost. They occur when the equilibrium price cannot reflect the true costs associated with the product or service. As a result, externalities tend to throw the market out of balance, which results in market failure. In this way, they prevent the attainment of efficient markets.

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