Question

ec120oc - quiz 4a formula sheet.pdf
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question 9 (1 point)
why do private markets fail to account for externalities?
the effects of externalities are difficult to measure in private markets.
the government can easily correct any adverse effect on the market that externalities may cause.
decision makers in the market fail to take into account the external effects of their behaviour.
sellers include costs associated with externalities in the price of their products.

Explanation:

Externalities occur when the actions of one party affect another party not directly involved in the transaction. In private markets, decision - makers (producers and consumers) mainly focus on their own private costs and benefits. They do not consider the external costs (negative externality) or external benefits (positive externality) that their actions impose on third parties. For example, a factory may pollute the environment (a negative externality) but not account for the cost of pollution in its production decisions as it is only concerned with its private production costs.

Answer:

Decision makers in the market fail to take into account the external effects of their behaviour.