If the production of a good created both external costs and external benefits, but the external costs were greater, without government intervention, a market economy will:
A)not produce the product at all.
B)overproduce the product.
C)underproduce the product.
D)produce the optimal amount of the product.

Question

If the production of a good created both external costs and external benefits, but the external costs were greater, without government intervention, a market economy will:
A)​not produce the product at all.
B)​overproduce the product.
C)​underproduce the product.
D)​produce the optimal amount of the product.

Quizplus · Accepted Answer

When a good creates external costs that are greater than its external benefits, without government intervention, a market economy tends to overproduce the product. This is because the private costs borne by producers are less than the social costs (private costs plus external costs), leading to a higher production level than what would be socially optimal.

If the Production of a Good Created Both External Costs