Suppose that flu shots create a positive externality equal to $12 per shot. What is the relationship between the equilibrium quantity and the socially optimal quantity of flu shots produced?
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 presence of a positive externality, the socially optimal quantity (where Marginal Social Benefit or MSB = Marginal Social Cost or MSC) is greater than the equilibrium quantity (where Marginal Private Benefit or MPB = Marginal Private Cost or MPC). As flu shots create a positive externality equal to $12 per shot, the MSB of producing flu shots is higher than the MPB. Therefore, the socially optimal quantity of flu shots is greater than the equilibrium quantity, leading to a market failure.

Suppose That Flu Shots Create a Positive Externality Equal to $12