Question

Industries with negative externalities result in market failures because

price is too low and quantity is too low

price is too low and quantity is too high

price is too high and quantity is too low

price is too high and quantity is too high

Answer 1

When action of one individual creates loss to others but people who get loss due to that person action, does not receive any compensation from that person, then it is called negative externality.

Due to negative externality market fails because too much quantity is produced which leads to more problem to others who does not take part in the production process. So in case of negative externality Marginal private cost line is to the right of marginal social cost line. When private equilibrium is attained by the intersection of MB curve and MPC, then negative externality leads market failiure because the quantity production is more than the social optimum level and price is low.

Hence it can be said that Industries with negative externalities result in market failures because price is too low and quantity is too high.

Hence option second is the corrct answer.