Y1 23 Negative externalities

Question 1

What is a negative externality?

Answer 1

The cost to a third party as a result of an economic transaction

Question 2

Analysis chain for negative externality in production

Answer 2

Firms only care about self interest and overproduce goods/services, prices in market falls and becomes too low, misallocation of resources

Question 3

Analysis chain for negative externality in consumption

Answer 3

Consumers act in self interest, overconsume good/service creating misallocation of resources