When there is an external cost, the unregulated market
A) overproduces the good or service.
B) underproduces the good or service.
C) reaches the most efficient solution.
D) minimizes public welfare.

Question

Quizplus · Accepted Answer

In an unregulated market with external costs, producers are not held responsible for the full cost of their actions, and as a result, they will tend to overproduce the good or service. This is because the production of the good or service will generate benefits for the producer but also impose costs on society that are not reflected in the price. Therefore, producers will continue to produce until the marginal private benefit equals marginal private cost, while ignoring the external costs imposed on society. As a result, the market will overproduce the good or service, leading to a socially inefficient outcome.

When There Is an External Cost, the Unregulated Market