Why are externalities called market failures? Are pecuniary externalities also an example of market failure?
What will be an ideal response?
Externalities are called market failures because the market allocates resources without considering the costs and benefits of externalities. Since firms and individuals do not consider externalities when they make choices, the market fails to arrive at a socially efficient outcome. Pecuniary externalities are not market failures because they do not result in market inefficiencies. Pecuniary externalities exist when market transactions affect third parties, but only through the market price. The market price will then correctly reflect the society-wide impact of market transactions and therefore pecuniary externalities are not market failures.
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What will be an ideal response?
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a. saved by the firm at each alternative interest rate b. invested by the firm at each alternative interest rate c. saved by the firm at each alternative rate of time preference d. invested by the firm at each alternative marginal resource cost e. saved by the firm at each alternative marginal revenue product of investment
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