If the economy relies entirely on the market mechanism to answer the WHAT,HOW,and FOR WHOM questions,it tends to

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Quizplus · Accepted Answer

When the economy relies entirely on the market mechanism to answer the WHAT, HOW, and FOR WHOM questions, it tends to underproduce goods that yield external benefits (e.g. education, health care, environmental protection) because the private individuals will not consider the positive effects that these goods have on society as a whole. On the other hand, it tends to overproduce those goods that generate external costs (e.g. pollution, deforestation, overfishing) because the private individuals do not have to bear the full costs of their actions. This creates a market failure known as externalities. Therefore, option C is the best choice.

If the Economy Relies Entirely on the Market Mechanism to Answer