From the behavioral premise underlying economic analysis, and the rule which agents must follow in deciding what to do if allocation and distribution is to be Pareto efficient, we see that the externalities problem arises because ----
Question 3 options:
agents are not rational
agents ignore external costs and external benefits in making decisions
agents overestimate private costs and private benefits in making decisions
agents ignore the effect their actions have on the welfare of others, bystanders, in making decisions
both answer #2 and #4 are correct