Question

When producers do not have to pay the full cost of producing a product, they tend to:a. overproduce the product because of a negative externality. b. underproduce the product because of a positive externality. c. overproduce the product because of a positive externality. d. underproduce the product because of a negative externality.

Answer 1

Answer:

The most applicable answer from my point is in such a scenario, producers overproduce the product because of a supply-side market failure.

Explanation:

So what is market failure? Simple, Market failure occurs when a market is unable to effectively and efficiently manage its resources because of the breakdown of price mechanisms functions which rare caused by negative and sometimes positive externalities.

In here, Supply side market failure occurs when the producers don't have to pay the full cost of their output. That is the actual cost of production is greater that the recorded cost.

In Market failure, the supply and demand of the market do not meet the equilibrium price and quantity and eventually leads to the loss of social welfare and ineffective economic decision making.

Imperfect information in the market and the increase of power in the sellers side could lead to supply side market failure.