When external costs result from the production of a good,

Question

Quizplus · Accepted Answer

When external costs result from the production of a good, neither the producers nor the consumers pay for the full cost of production, leading to a market failure. This creates a situation where producers have an incentive to produce more than what would be socially optimal, and consumers have an incentive to consume more than what would be socially optimal, thus resulting in overproduction and overconsumption. Therefore, both producers and consumers have an incentive to produce and consume too much.

When External Costs Result from the Production of a Good