What are external costs? When external costs are present, will market allocation result in too much or too little output of the good relative to the ideal efficiency level? Explain.

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Social Studies

Morgan Valenzuela

5 June, 15:20

What are external costs? When external costs are present, will market allocation result in too much or too little output of the good relative to the ideal efficiency level? Explain.

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Norah Bernard · Answer 1

When a cost is imposed on a party that is not part of a transaction, then we deal with an external cost or negative externality. That party can't control whether the transaction takes place or not. External costs of activities can lead to market failure if they exceed their benefits, and there will be no market failure if the external costs don't exceed the benefits.