When a positive externality is present:
A)resources are underallocated to the source of externality.
B)transaction costs are positive.
C)there is no possibility to increase the gains from trade.
D)resources are overallocated to the source of externality.

Question

Quizplus · Accepted Answer

When a positive externality is present, resources are underallocated to the source of the externality. This means that individuals or firms are not investing enough in the production or consumption of the good, resulting in a suboptimal outcome. For example, if there is a positive externality associated with education, such as an increase in societal productivity, individuals may not invest enough in education since they do not fully reap the benefits. As a result, there is a market failure and government intervention may be necessary to correct the underallocation of resources.

When a Positive Externality Is Present