When the loss from a business-stealing externality exceeds the gain from a product-variety externality,
A)firms are more likely to operate at efficient scale.
B)there are likely to be too many firms in a monopolistically competitive market.
C)market efficiency is likely to be enhanced by the entry of new firms.
D)all firms are earning negative economic profit.

Question

Quizplus · Accepted Answer

When the loss from a business-stealing externality exceeds the gain from a product-variety externality, it indicates that the entry of new firms primarily takes away customers from existing firms rather than increasing the overall market's utility through variety. This leads to an excessive number of firms in the market, each with diminished market shares, which is not an efficient outcome.

When the Loss from a Business-Stealing Externality Exceeds the Gain