Final answer:
The statement is false, as negative externalities like pollution cause markets to overproduce and underprice goods, leading to market failure.
Step-by-step explanation:
The correct answer is false. When a negative externality exists, such as pollution, markets tend to overproduce the good connected with the negative externality. Externalities like pollution mean that not all social costs are incorporated into the market price, leading to a scenario where the private market fails to account for these costs in production. Consequently, the market output is higher than the socially efficient level, where social costs of production would be equal to social benefits to consumers.
This is known as market failure, resulting in a greater quantity being produced than what would be if all costs were considered. When a negative externality exists, it means that the production or consumption of a good imposes costs on society that are not reflected in the price of the good. In this case, the market is said to underproduce the good connected with the negative externality because the social costs of production exceed the private costs. This leads to an inefficient allocation of resources, as the market does not account for all the costs involved.