Consider two goods-one that generates external benefits and another that generates external costs. What would a competitive market economy tend to produce?
A) too little of both goods, relative to the social optimum
B) too much of the good that generates external benefits relative to the social optimum, and too little of the good that generates external costs
C) too little of the good that generates external benefits relative to the social optimum, and too much of the good that generates external costs
D) too much of both goods, relative to the social optimum

Question

Quizplus · Accepted Answer

In a competitive market economy, producers are motivated to maximize their profits by producing until their marginal cost equals their marginal revenue. However, they do not take into account the external costs or benefits associated with their production. Therefore, for the good that generates external benefits, producers will likely produce too little because they do not receive the full social benefit of their production. For the good that generates external costs, producers will likely produce too much because they do not bear the full social cost of their production. Thus, a competitive market economy tends to produce too little of the good that generates external benefits relative to the social optimum, and too much of the good that generates external costs.

Consider Two Goods-One That Generates External Benefits and Another That