External costs cause overproduction of demerit goods

Steps:

• Demerit goods, like tobacco or alcohol, harm society beyond individual use.
• In free markets, producers ignore external costs, such as health or environmental damage.
• This leads to prices below true social cost, encouraging excess production and consumption.
• Government intervention, like taxes, aims to correct this market failure.

Why B is correct:

• Demerit goods involve negative externalities (external costs), so market equilibrium produces more than the socially optimal level, as private costs exclude societal harms.

Why the others are wrong:

• A: Clear information helps informed choices but doesn't cause overproduction; it might reduce it.
• C: High taxes correct overproduction by raising prices, not cause it.
• D: Low demand reduces production, leading to underproduction, not overproduction.

Final answer: B