Negative externalities lead markets to produce a smaller quantity of a good than is socially desirable, while positive externalities lead markets to produce a larger quantity of a good than is socially desirable.

Question

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Negative externalities lead markets to produce a larger quantity of a good than is socially desirable because the cost to society is higher than the private cost. Positive externalities lead markets to produce a smaller quantity of a good than is socially desirable because the benefit to society is greater than the private benefit.

Negative Externalities Lead Markets to Produce a Smaller Quantity of a Good