Why are externalities considered market failures?

Question

Why are externalities considered market failures?

a.     They are economically inefficient 

b.     They are unethical

c.     They cause prices to not reflect the social cost of consumption/production

d.     They cause governments to use controls

Answer 1

Externalities are considered 3rd party harm or 3rd party benefits.

The are market failures as the "market" produces an overproduction of negative externalities and an underproduction of positive externalities.

The market price is too low for a negative externality and therefore we tax it to raise the price and reduce the production/consumption.

The market price is too high for a positive externality therefore we subsidize it lower the price to increase the production/consumption.

C. They cause prices to not reflect the social cost of consumption/production.