In a free-market economy, a product which entails a positive externality will be:
A) Overproduced
B) Underproduced
C) Produced at the optimal level
D) Provided solely by the government

Question

Quizplus · Accepted Answer

In a free-market economy, producers will only take into account their private costs and benefits when making production decisions. This means that they may not consider the positive externalities that their product creates for society. As a result, the product will be underproduced, as the social benefits are greater than the private benefits. To achieve the optimal level of production, some form of government intervention, such as a subsidy, may be necessary to incentivize producers to take into account the positive externality.

In a Free-Market Economy, a Product Which Entails a Positive