The price-support strategy exacerbated which of the following problems related to externalities?

• A. Efficient allocation of resources
• B. Overproduction leading to increased negative externalities
• C. Reduction in government intervention
• D. Underproduction resulting in positive externalities

Answer: (B)

Verified step by step guidance

1. Understand the concept of externalities: Externalities occur when a market activity affects third parties not directly involved in the transaction, leading to either positive or negative side effects.
2. Recognize what a price-support strategy is: It is a government policy that sets a minimum price for a good, often above the equilibrium price, to support producers' incomes.
3. Analyze the effect of price supports on production: Since the price is artificially kept high, producers are incentivized to produce more than the socially optimal quantity.
4. Connect overproduction to negative externalities: Overproduction means more of the good is produced and consumed than is efficient, which can increase negative externalities (e.g., pollution) associated with that good.
5. Conclude that the price-support strategy exacerbates the problem of overproduction leading to increased negative externalities, thus causing inefficient allocation of resources.