Products that result in external benefits for society require regulation to correct for
A) underproduction.
B) overproduction.
C) an equilibrium price that is too low.
D) an equilibrium quantity that is too high.

Question

Quizplus · Accepted Answer

When a product results in external benefits for society, such as clean air or reduced traffic congestion, the market tends to underproduce. This is because the producers do not receive the full value of the benefits they are providing to society, and therefore do not have enough incentive to produce the optimal amount. Regulation is necessary to correct for this underproduction and ensure that the optimal quantity is produced.

Products That Result in External Benefits for Society Require Regulation