A positive externality from consuming a good causes the market quantity to be, compared with the socially efficient quantity, generally:
Correct answer: B. Lower because social benefits exceed private benefits
- A. Higher because private benefits are overstated
- B. Lower because social benefits exceed private benefits
- C. Equal because external effects are fully priced
- D. Lower because private benefits exceed social benefits
Explanation
With a positive consumption externality, benefits to others are not fully reflected in the buyer's private benefit. Consequently, the market understates the total social benefit and produces less than the efficient quantity.
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About Microeconomics
Individual consumers, firms and markets are examined through demand and supply, elasticity, consumer choice, production, costs, revenue and the determination of prices and output. The topic also covers market structures such as perfect competition, monopoly and oligopoly, plus market failure, externalities and the distinction between microeconomic decisions and economy-wide outcomes.
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