Which of the following statements about a market that is affected by a positive production externality is correct?
A)the optimum level of output is less than the free market level of output and the optimum price is greater than the free market price
B)the optimum level of output is greater than the free market level of output and the optimum price is less than the free market price
C)the optimum level of output is greater than the free market level of output and the optimum price is greater than the free market price
D)the optimum level of output is less than the free market level of output and the optimum price is less than the free market price

Question

Quizplus · Accepted Answer

A positive production externality occurs when a producer creates benefits for third parties that are not reflected in the market price. In such a case, the social benefit of the good or service is greater than the private benefit, and the market fails to produce the efficient level of output. The optimum level of output occurs when the marginal social benefit equals the marginal social cost, which is greater than the marginal private cost. Therefore, the optimum level of output is greater than the free market level of output. Additionally, the optimum price is less than the free market price since the marginal private cost is less than the marginal social cost, and the market price reflects only the former. Therefore, both statements in option B are correct.

Which of the Following Statements About a Market That Is