Microeconomics: Questions on Public Sector Essay Example

? The smoker's pleasure is offset in part by non-smokers displeasure. There is where externalities come in play. This refers to all costs or benefits of a market activity borne by a third party, by someone other than the immediate producer or consumer.

As a consequence the market will fail to produce the right mix of output. The market will under produce goods that yield external benefits and over produce those that generate external costs. Externalities also exist in production. The cost of pollution is not reflected in the price of electricity, the firm will tend to produce more pollution that is socially desirable. In my opinion to change this the government or someone in charge has to change market outcomes.