Question

Consider two goods - one that generates external benefits and another that generates external cost. A competitive market economy would tend to produce too __ of the good that generates external benefits and too __ of the goods that generate external costs

Answer 1

In a competitive market economy, there tends to be an overproduction of goods that generate external benefits and an underproduction of goods that generate external costs.

Step-by-step explanation:

In a competitive market economy, there tends to be an overproduction of goods that generate external benefits and an underproduction of goods that generate external costs.

For the good that generates external benefits, the market does not fully capture all the social benefits, resulting in an insufficient quantity being produced. On the other hand, for the good that generates external costs, the market does not consider all the social costs, leading to an excessive quantity being produced.

This imbalance occurs because externalities, like pollution, cause markets to fail in accounting for all social costs and benefits.