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Homework answers / question archive / A market economy over-allocates resources to the production of goods which involve _________ _________
A market economy over-allocates resources to the production of goods which involve _________ _________ .
(a) spillover costs
(b) spillover benefits
The answer to this question is:
(a) spillover costs
Spillover costs are also known as a negative externality. A negative externality is an uncompensated cost to bystanders resulting from consumption or production activity. Since negative externalities are not taken into consideration in the cost of the market economy (free market), the business gets wrong signals and apportion resources toward negative externality as opposed to the positive externality.
