If an action by an individual has a positive external effect, the level of activity that maximizes the individual's well-being is:
A) equal to the level that maximizes society's well-being.
B) less than the level that maximizes society's well-being.
C) greater than the level that maximizes society's well-being.
D) equal to, less than, or greater than the level that maximizes society's well-being, depending on the strength of the external effect.

Question

Quizplus · Accepted Answer

When an action has a positive external effect, it means that it benefits others in addition to the individual taking the action. However, the individual may not take these external benefits into account when deciding how much of the action to undertake. As a result, the individual is likely to engage in less of the activity than would be optimal from society's perspective, which would include both the individual's and the external benefits. Therefore, the level of activity that maximizes the individual's well-being is less than the level that maximizes society's well-being, because the individual does not consider the positive external effects of their actions.

If an Action by an Individual Has a Positive External