Question

Government intervention is always required to correct the market failure associated with externalities. True or false? Justify your answer

Answer 1

True

Negative externalities arise when costs exceed benefit and it is borne by the public or some other person, which leads to market failure in the long run.

Externalities can be accounted by the equation,
Marginal Social Cost = Marginal Private Benefit + Marginal External Costs

So, without the government intervention, the producer would supply a good at a lesser price as the cost of externality is not included in the final price. But in the long run, the producer would enjoy the benefit of MEC in the e=long run which needs to be borne by the public. So, with the government intervention, it can enforce the producer to include the MEC, though it would increase the cost and the reduce the quantity of goods produced but would help to remove the externality