Question

Consider two goods--one that generates external benefits and another that generates external costs. A competitive market economy would tend to produce

Answer 1

Produce more of the good that generates external cost and less of the good that creates external benefit.

Step-by-step explanation:

External benefits refer to the situation where the benefit of production of goods or services goes to a third party that is not directly involved in the process of production.

Similarly, external cost refers to the situation where the cost of production of goods and services is borne by a third party which is not directly involved in the process of production.

A competitive market economy would tend to produce more of the good that generates external cost and less of the good that creates external benefit. This is because in case of external cost the private cost will be lower than social cost, so the firms will be able to produce more of the good.