chapter externalities.pptVIP

10 Externalities Recall: Adam Smith’s “invisible hand” of the marketplace leads self-interested buyers and sellers in a market to maximize the total benefit that society can derive from a market. But market failures can still happen. EXTERNALITIES AND MARKET INEFFICIENCY An externality refers to the uncompensated impact of one person’s actions on the well-being of a bystander. Externalities cause markets to be inefficient, and thus fail to maximize total surplus. EXTERNALITIES AND MARKET INEFFICIENCY An externality arises... . . . when a person engages in an activity that influences the