Chapter 3, Problem 11P

To determine

The problems with letting the market determine the amount of a certain good to be produced if there is an external cost, or negative externality, associated with its production.

Introduction:

Externality is the cost or benefit of a commodity that affects neither the producer nor the consumer but the third party in a transaction. Example of such externalities is the air pollution created by factories, cost of dumping the waste generated by industries, noise pollution by jet planes and loudspeakers, etc. However, these are social costs to the companies and they might not be accounted for in the price of the commodity by the producer.