Question

​Explain whether the market produces too little, too much, or the right amount: (a) of goods with detrimental externalities; (b) of goods with public good characteristics.

Answer 1

goods with detrimental externalities are produced too much by market as the negative externalities are not captured in the private marginal benefit and cost functions. Negative externality is a concept captured by social costs and social marginal cost. by addition of negative costs to private cost function. As the private costs and marginal costs are lower than social costs and social marginal cost, the equilibrium price is lower, therefore the quantity produced is higher.

public goods mean non-excludable and non-rival. Non-excludable means that the benefits cannot be limited to those who have paid for it. Non-rival means consumption by one consumer does not impact consumption by other. Market will produce too little of it as the correct price and value cannot be determined by the individual's demand curve, nor can the free-rider problem be solved i.e. excluding those that did not pay for it.