The product-variety externality associated with monopolistic competition arises because in monopolistically competitive markets firms try to differentiate their products.

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In monopolistic competition, firms try to differentiate their products in order to make them appear distinct from their competitors' products. This can lead to a product-variety externality, where each firm's product variety positively affects the utility of consumers, creating a positive externality for the market as a whole. This externality is not present in perfect competition where all firms offer identical products.

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