When an activity results in the creation of external benefits, markets will produce more than the socially optimal level of that activity.

Question

Quizplus · Accepted Answer

When an activity results in the creation of external benefits, the market will produce less than the socially optimal level of that activity. This is because the market only takes into account the private benefits and costs of the activity, and not the external benefits. As a result, the market will produce less of the activity than is socially optimal.

When an Activity Results in the Creation of External Benefits