If there are external beneﬁts associated with the consumption of a good or service,
A) the market demand curve will overestimate the true demand curve.
B) the market demand curve will underestimate the true demand curve.
C) consumers are paying for all these beneﬁts.
D) the market demand curve will be the vertical summation of the individual demand curves.

Question

Quizplus · Accepted Answer

External benefits are benefits that are enjoyed by third parties as a result of consumption of a good or service by others. Since the market demand curve only reflects the private benefits to consumers and does not consider external benefits, it will therefore underestimate the true demand for the good or service. This is because the market demand curve fails to account for the additional value that the good or service provides to society as a whole.

If There Are External Beneﬁts Associated with the Consumption of a Good