If left to market forces, activities that produce external benefits wil be over-produced.

Question

Quizplus · Accepted Answer

If left to market forces, activities that produce external benefits will not be produced enough to reflect their full social value. This is because the market only takes into account the private benefits and costs of an activity, while ignoring the external benefits and costs that affect society as a whole. Therefore, there is a market failure in the allocation of resources and government intervention through policies such as subsidies or taxes may be necessary to correct the market failure and incentivize the production of activities with positive externalities.

If Left to Market Forces, Activities That Produce External Benefits