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    Externalities: Interventions

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    Positive and negative externalities lead free markets to divert from allocative efficiency. The possible role that government could play in improving allocative effiency where market failure exists. Answer the following questions and provide APA format (100 words each)

    Are there markets where the divergence from allocative efficiency should be left alone (gov't stay out)?

    Are there markets where the divergence is so great that gov't absolutely should interfere?

    Are there actions that gov't could take in any of the markets you talk about (above) that would facilitate a private solution?

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    There are markets where the divergence from allocative efficiency should be left alone. Allocative efficiency is a state of economy in which production is made in accordance with consumer preferences. Every good or service is produced up to the point where the last unit gives a marginal benefit to the consumers (a). There are situations in which marginal inefficiency is created for marketing purposes. For example, in monopolistic competition, there is some product differentiation that is created to charge a slightly higher price. In such situations the government should stay out. In situations where by shifting resources in the economy, a gain in benefit to one person is greater than ...

    Solution Summary

    This solution explains compensating for externalities. The sources used are also included in the solution.