If there are positive externalities associated with the consumption of a good or service:
A) the private demand curve will overestimate the true demand curve.
B) the private demand curve will underestimate the true demand curve.
C) consumers will be willing to pay for all these benefits in private markets.
D) the market demand curve will be the vertical summation of the individual demand costs.

Question

Quizplus · Accepted Answer

Positive externalities are benefits that are enjoyed by third parties beyond the buyer and seller of a good. When there are positive externalities, the private demand curve will only reflect the private benefits enjoyed by the consumer and will therefore be lower than the social demand curve, which reflects the total benefits enjoyed by everyone in society. As a result, the private demand curve will underestimate the true demand curve. Consumers may not be willing to pay for all the social benefits in private markets, leading to underproduction of the good or service relative to the socially optimal level.

If There Are Positive Externalities Associated with the Consumption of a Good