Which one of the following statements is <strong>NOT</strong> correct?
- A. The market mechanism over-produces a good that generates positive externality. ✓
- B. A cap and trade of pollution permits can be used by the government to achieve the social optimum.
- C. The optimal amount of subsidy in the case of an activity that produces a positive externality is the difference between the social benefit and the private benefit at the optimum.
- D. Tragedy of Commons is an example of negative externality.
Correct Answer: A. The market mechanism over-produces a good that generates positive externality.
Explanation
In a free market, goods that generate positive externalities are under-produced, not over-produced, because producers do not receive compensation for the external benefits provided to society.
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