Name three examples of negative externalities that depict instances of market failure.

Refer explanation...

Explanation:

A negative externality occurs when the production or consumption of a good or service creatives a negative impact on a third party. Hence, the social cost is higher than the private cost.

I have provided 4 examples of negative externalities below, although the requirement is 3 :)

A. Negative externalities in production:

1. When rainforests are cut down for animal rearing, it leads to an increase in CO2 in the atmosphere which can damage the ozone layer and cause global warming.

2. Using pesticides on vegetation protects them from insects, however it leads to harmful carcinogens to enter the environment and create pollution.

B. Negative externalities in consumption:

1. Consumption of cigarettes may deteriorate the health of those around, who are vulnerable to passive smoking.

2. Alcohol consumption develops drunk drivers who increase the risk of car accidents and social disorder.

Market failure occurs when the price mechanism fails to incorporate all the costs and benefits involved in the production or consumption of a particular good or service. The market fails by not being able to supply the socially optimum level of output of a good or a service. Hence there is an over-consumption of a good that creates negative externalities or under-consumption of a good that produces positive externalities.

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