Consider an industry producing good X.The quantity of good X produced in a competitive free market will be greater than the socially optimal level if

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When production of good X generates a negative externality, the social cost of producing the good is greater than the private cost. In a competitive free market, firms only consider the private cost when making production decisions, leading to a production quantity that is greater than socially optimal. This leads to overproduction, which leads to negative effects on society such as pollution or reduced public health.

Consider an Industry Producing Good X