Because of the kind of externalities that tend to be generated from general R&D resources bought by firms, the equilibrium price of R&D:
A) is above the optimal level, and quantity is below the optimal level.
B) is below the optimal level, and quantity is above the optimal level.
C) and quantity of R&D are both above the optimal level.
D) and quantity of R&D are both below the optimal level.
E) must fall in order for the market to reach equilibrium.

Question

Quizplus · Accepted Answer

R&D activities often generate positive externalities, meaning they provide benefits to others not directly involved in the transaction. This leads to underinvestment in R&D by the market because firms cannot capture the full value of their investment, resulting in both the equilibrium price and quantity of R&D being below the socially optimal level.

Because of the Kind of Externalities That Tend to Be