Refer to the diagram of the market for product X. Curve St embodies all costs (including externalities), and Dt embodies all beneﬁts (including externalities) associated with the production
And consumption of X. Assuming the market equilibrium output is Q1, we can conclude that the
Existence of external
A) costs has resulted in an overallocation of resources to X.
B) beneﬁts has resulted in an overallocation of resources to X.
C) costs has resulted in an underallocation of resources to X.
D) beneﬁts has resulted in an underallocation of resources to X.

Question

Refer to the diagram of the market for product X. Curve St embodies all costs (including externalities), and Dt embodies all beneﬁts (including externalities) associated with the production
And consumption of X. Assuming the market equilibrium output is Q1, we can conclude that the
Existence of external
A) costs has resulted in an overallocation of resources to X. 
B) beneﬁts has resulted in an overallocation of resources to X. 
C) costs has resulted in an underallocation of resources to X. 
D) beneﬁts has resulted in an underallocation of resources to X.

Quizplus · Accepted Answer

The existence of external benefits associated with the production and consumption of X means that the social benefit exceeds the private benefit, resulting in an underallocation of resources to X at the market equilibrium output Q1. This is because the market only considers the private benefits and costs and ignores the externalities. Hence, D is the correct answer.

Refer to the Diagram of the Market for Product X