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

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

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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.