Consider two goods--one that generates external benefits and another that generates external costs. A competitive market economy would tend to produce too

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In a competitive market economy, producers only take into account the private cost and benefit of their production, and do not consider the external costs or benefits. Therefore, they are likely to produce too much of the good that generates external costs and too little of the good that generates external benefits. For example, a factory that emits pollution may produce too much, while a company that invests in research and development may not produce enough as they do not receive the full benefit of their efforts.

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