Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It leads to overproduction of goods, as producers do not account for external costs.
B
It always results in a decrease in consumer prices due to increased competition.
C
It ensures that all market participants benefit equally from production.
D
It has no impact on market efficiency as prices reflect true costs.
Understanding the Answer
Let's break down why this is correct
Answer
A negative externality, like pollution, occurs when a company's actions harm others but the company does not pay for this harm. This can lead to market outcomes that are inefficient because the true cost of production is not reflected in the price of goods. For example, if a factory pollutes a river, the costs of cleaning the river or the health issues caused by the pollution are not included in the price of the factory's products. As a result, the factory may produce more than what is socially optimal, leading to overproduction and more pollution than is desirable for society. Therefore, addressing negative externalities is important to align private costs with social costs, helping to improve overall market efficiency.
Detailed Explanation
When pollution happens, companies often make more products without thinking about the harm they cause. Other options are incorrect because Some might think that pollution makes prices go down because there are more products; It might seem like everyone benefits from production, but pollution often harms some people more than others.
Key Concepts
Negative externalities
Market efficiency
Social welfare
Topic
Externalities and Their Effects
Difficulty
hard level question
Cognitive Level
understand
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