1. When external costs result from the production of a good: a) Producers have a

Question

1. When external costs result from the production of a good:
a) Producers have an incentive to produce too little
b) Both producers and consumers have an incentive to produce and consume too much

If the economy relies entirely on the market mechanism to answer the WHAT, HOW, and FOR WHOM questions, it tends to:

a)Under-produce goods that yield external benefits and overproduce those that generate external costs.
b)Under-produce goods that yield external benefits and under-produce those that generate external costs.

Explanation / Answer

b) Both producers and consumers have an incentive to produce and consume too much b)Under-produce goods that yield external benefits and under-produce those that generate external costs.

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