Question

Suppose a firm that produces for this market is able to dump toxic chemicals into a river next to its factory, which poisons wildlife and harms the health of nearby residents who have no business with the company. This scenario is characterized by , which is an example of . Grade It Now Save & Continue

Answer 1

Answer: an externality, market failure

Explanation:

Externality, simply refers to the gains and the costs that a third party gets due to the productivity or consumption activities of an individual or firm. In the above question, a negative externality occurs as the production of the firm has a negative effect on wildlife and the people living in the area.

In this case, the externality results in market failure which is due to the inefficiency with regards to the distribution of the goods in the free market.