Final answer:
In a market economy, goods with negative externalities are overproduced and underpriced, while goods with positive externalities are underproduced.
Step-by-step explanation:
A market economy tends to overproduce goods with negative externalities and underproduce goods with positive externalities. Services that involve negative externalities, such as pollution, are overproduced and underpriced since the market fails to price these externalities into the cost of production. This leads to a scenario where the real societal cost of production exceeds the personal cost borne by the producer.
On the other hand, goods with positive externalities—benefits experienced by others when an individual or firm consumes or produces a good—tend to be underproduced because the market does not reward the producers for the external benefits their goods or services provide. In this sense, the market fails to align social costs and benefits, which can lead to an inefficient allocation of resources. As a result, government intervention is often proposed to correct these inefficiencies, through taxation, regulation, or subsidies.