Markets will underproduce goods that yield external benefits and overproduce those that generate external costs.
The market fails by overproducing goods that have external costs and underproducing goods that have external benefits.

Question

Quizplus · Accepted Answer

This is a well-known market failure called the "externality problem". Externalities refer to the costs or benefits incurred by individuals who are not directly involved in the production or consumption of a good. When external benefits (such as education or healthcare) are not reflected in market prices, firms and individuals may underproduce them. On the other hand, when external costs (such as pollution or congestion) are not fully borne by producers or consumers, they will tend to overproduce those goods. As a result, government intervention is often necessary to correct these externalities and ensure that goods are produced at socially optimal levels.

Markets Will Underproduce Goods That Yield External Benefits and Overproduce