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    Externality and Effect on Market Outcome

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    Hi! I need help with the following (2) questions:

    (1) How does an externality (Define the term, please, which can be by use of an example) affect the market outcome?

    (2) Is it possible for a government's solution to a market failure to actually worsen the failure? For example, consider that the Federal Reserve added 200 billion dollars to the mortgage market to improve the liquidity of fund available to finance mortgages (It now plans to add up to $700 billion more through the purchase of preferred stocks in the U.S. banking system). Please explain your answer.

    *Please include references if necessary!!!

    *Yes, you can use online references with proper citations.

    Thank you!

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    https://brainmass.com/business/marketing-strategy/externality-effect-market-outcome-282645

    Solution Preview

    (1) How does an externality (Define the term, please, which can be by use of an example) affect the market outcome?
    The externality is a spillover effect when an economic transaction takes place. It is the consequence of an economic transaction that is experienced by unrelated third parties. From another perspective these are costs or benefits that are experienced by the society but are considered when pricing a good or service.
    Externalities affect market outcome in several ways. For example, a firm making a chemical that emits toxic fumes in its manufacture is required by the government to ...

    Solution Summary

    This posting gives you an in-depth insight into externalities

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