Use the following figure. MB and MC represent private, or individual, marginal benefits and costs. MBS represents marginal benefits to society when positive externalities are present, and MCS represents marginal costs to society when negative externalities are present.

-If an individual carries out an activity that has positive external effects and no negative external effects, the individual's net benefit and society's net benefit will:
A) both be maximized at activity level 3.
B) both be maximized at activity level 4.
C) be maximized at activity levels 2 and 3, respectively.
D) be maximized at activity levels 2 and 4, respectively.

Question

Use the following figure. MB and MC represent private, or individual, marginal benefits and costs. MBS represents marginal benefits to society when positive externalities are present, and MCS represents marginal costs to society when negative externalities are present.
 
-If an individual carries out an activity that has positive external effects and no negative external effects, the individual's net benefit and society's net benefit will:
A) both be maximized at activity level 3. 
B) both be maximized at activity level 4. 
C) be maximized at activity levels 2 and 3, respectively. 
D) be maximized at activity levels 2 and 4, respectively.

Quizplus · Accepted Answer

When an individual carries out an activity with positive external effects and no negative external effects, the individual's net benefit is maximized at a lower activity level (2) because they do not account for the external benefits to society. Society's net benefit, which includes both the individual's benefit and the external benefits, is maximized at a higher activity level (4) because it accounts for the full range of benefits generated by the activity.

Use the Following Figure