Answer :
Final answer:
Externalities in economics refer to situations where the cost or benefit of an economic activity is not fully accounted for internally. Market failure due to externalities leads to inefficient resource allocation, requiring government intervention for correction.
Explanation:
Externalities in economics are situations in which the cost or benefit of an economic activity is not entirely borne or received by those involved in the activity. One key challenge in externalities is the market failure that occurs when the price mechanism fails to account for the full social costs or benefits of production or consumption. This leads to an inefficient allocation of resources.
For example, if a factory pollutes a nearby river, the factory owners do not bear the full cost of the pollution, impacting the community's well-being. This externality problem requires government intervention through regulations or taxes to internalize the external costs and promote efficiency in resource allocation.
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