The product-variety externality is associated with the:

• A. negative impact on the environment from increased production
• B. increase in consumer welfare due to a greater variety of products available in the market
• C. reduction in market efficiency due to government intervention
• D. decrease in producer surplus caused by increased competition

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of product-variety externality. This externality occurs when the availability of a greater variety of products in the market affects consumer welfare, typically positively, because consumers value having more choices.
2. Step 2: Recognize that product-variety externality is a type of positive externality, meaning it generates benefits to consumers beyond the direct transaction between buyers and sellers.
3. Step 3: Analyze each option in the problem: the negative impact on the environment relates to negative externalities, not product-variety externality; reduction in market efficiency due to government intervention is unrelated; decrease in producer surplus caused by competition is about producer effects, not product variety.
4. Step 4: Identify that the correct association is the increase in consumer welfare due to a greater variety of products available in the market, which aligns with the definition of product-variety externality.
5. Step 5: Summarize that product-variety externality highlights how expanding product choices can enhance consumer satisfaction and welfare, representing a positive external effect in the market.