How best to answer a question on how negative externalities lead to market failure.

 When answering a question of this kind I like to use te acronym NOPOWA to ensure I hit all the key points. It is always good to draw the graph showing the negative externality to help illustrate your answer ( I would ask the student first to see if they could draw it and then advise them on where they were going wrong and give them tips on the graph drawing. Negative externality-where the marginal social costs are higher than themarginal private costs meaning there is an external cost not accounted for                                                            Outside the market- this means somebody outside ofthe market is negatively affected Price- this means the price is too low as the social costs are not paid for Ovecronsumption- due to the low price this encourages a higher consumption of the good than if the external costs were accounted for Welfare loss- this means society suffers a welfare loss Allocative inefficiency- there is inefficiency as too many resouces are being allocated to this good which causes the market failure If yu stick to this plan you will be able to hit all of the key points tat examiners are looking for particularly if you refer to the gaph when talking through the reasoning