If a good that features a positive externality is produced in an unregulated free market, the good will be:
A)over-produced and over-valued.
B)over-produced and under-valued.
C)under-produced and over-valued.
D)under-produced and under-valued.
E)none of the above

Question

Quizplus · Accepted Answer

In an unregulated free market, producers will only take into account the private costs and benefits of producing the good. As a result, they will not factor in the positive externality that the good creates for society. This will lead to an underproduction of the good, as the social benefits of the good are not being fully realized. The good will also be undervalued, as the market price will reflect only the private costs and benefits of production, and not the positive externality.

If a Good That Features a Positive Externality Is Produced