Markets will overproduce goods that generate external costs.

Question

Quizplus · Accepted Answer

Markets are driven by the profit motive, and producers will seek to maximize their profits. If the production of a good generates external costs, such as pollution or harm to public health, these costs are not reflected in the price of the good. As a result, the market will produce too much of this good, since the cost to society is not factored in. This is known as a market failure, and it often requires government intervention to correct.

Markets Will Overproduce Goods That Generate External Costs