The product-variety externality associated with monopolistic competition arises because in monopolistically competitive markets,

Question

Quizplus · Accepted Answer

In monopolistically competitive markets, firms try to differentiate their products in order to attract consumers and increase demand for their specific product. This variety of products generates a positive externality because it increases consumer choice and welfare. However, firms also face the negative externality of having to spend resources on advertising and product differentiation, which may lead to higher prices for consumers.

The Product-Variety Externality Associated with Monopolistic Competition Arises Because in Monopolistically