Question

If a nation protects an industry because it believes that there are positive externalities in the production process, it is asserting that the free market will:_______.

a. produce the correct amount but charge too high a price.
b. produce less than is optimal from society's point of view.
c. produce more than is optimal from society's point of view.
d. produce the correct amount but charge too low a price.

Answer 1

If a nation protects an industry due to positive externalities, it is asserting that the free market will produce less than what is optimal from society's point of view, warranting government intervention to address this market failure. option b.

Step-by-step explanation:

If a nation protects an industry because it believes that there are positive externalities in the production process, it is asserting that the free market will produce less than is optimal from society's point of view. The presence of positive externalities implies that the private benefits of production or consumption are less than the social benefits, leading to underproduction of the good or service relative to the socially optimal level. Therefore, the correct answer is (b) produce less than is optimal from society's point of view. When externalities are present, such as in the case of education or healthcare, a free market tends to produce a smaller quantity than is socially desirable because not all the benefits are captured by the producer, which justifies government intervention to correct the market failure.