Compared to ideal economic efficiency, when the production of a good generates external costs, competitive markets will result in an output that is too:
A) large and a price that is too high.
B) large and a price that is too low.
C) small and a price that is too high.
D) small and a price that is too low.

Question

Quizplus · Accepted Answer

When the production of a good generates external costs (costs not borne by the producer or consumer of the good, but by third parties), competitive markets tend to produce more of the good than is socially optimal because these external costs are not reflected in the market price. As a result, the price of the good is lower than it should be if it were to account for these external costs, leading to overconsumption and overproduction.

Compared to Ideal Economic Efficiency, When the Production of a Good