1.3.2 Externalities and Market Failure (Edexcel A-Level Economics Teaching PowerPoint)

This powerpoint covers and introduction to Externalities and Market Failure.

An externality is a cost or benefit that is not reflected in the market price of a good or service. So, let's take the example of pollution as a negative externality. When a company emits pollution, it imposes a cost on society that is not reflected in the price of its products. The cost is borne by the rest of society, and not by the company. This leads to an inefficient outcome where too much pollution is produced. Externalities are a major cause of market failure because they lead to an inefficient allocation of resources. Without intervention, markets won't correct this problem on their own.