Suppose that flower gardens create a positive externality equal to $1 per plant. What is the relationship between the equilibrium quantity and the socially optimal quantity of plants grown?
A)They are equal.
B)The equilibrium quantity is greater than the socially optimal quantity.
C)The equilibrium quantity is less than the socially optimal quantity.
D)There is not enough information to answer the question.

Question

Quizplus · Accepted Answer

In the absence of any externalities, market equilibrium occurs where marginal private cost (MPC) equals marginal private benefit (MPB). However, in this case, the external benefit (positive externality) of flower gardens is not reflected in the market price, so the marginal social benefit (MSB) is greater than the MPB. This means that the socially optimal quantity of plants is greater than the market equilibrium quantity. Therefore, the equilibrium quantity is less than the socially optimal quantity, which is represented by choice C.

Suppose That Flower Gardens Create a Positive Externality Equal to $1