When there is a positive externality in a free market, is it true that too much of the good is produced and consumed?

When discussing positive externalities in a free market, the correct understanding is that such externalities tend to lead to underproduction and underconsumption of a good. Positive externalities occur when the actions of an individual or firm result in benefits to others that are not reflected in the market price. For example, if a company invests in research and development that leads to new technology, the benefits of that technology may extend to other firms and consumers who did not pay for it.

This means that the overall social benefits of the good or service exceed the private benefits accrued by the producers and consumers. In a free market, producers and consumers make decisions based primarily on private costs and benefits. Consequently, they may not fully account for the external benefits that their activities generate for others, resulting in a quantity of the good being produced and consumed that is below the socially optimal level.

Thus, the statement in question is false; it is not true that too much of the good is produced and consumed when there is a positive externality. Instead, the free market tends to underproduce and underconsume goods and services associated with positive externalities.