When a production externality has a beneficial effect on a bystander at the market equilibrium:
A) society is unlikely to benefit from production subsidies
B) the social cost of production is less than the private cost
C) the private benefit from consumption is less than the social cost of production
D) none of the above is true

Question

Quizplus · Accepted Answer

If a production externality has a beneficial effect on a bystander at the market equilibrium, it means that the social benefit of production is greater than the private benefit. As a result, the social cost of production is less than the private cost, since the externality is benefiting someone who is not paying for it. Therefore, choice B is the correct answer. Choice A is incorrect because production subsidies can still be beneficial even if there are positive externalities. Choice C is incorrect because it is not mentioned in the question stem.

When a Production Externality Has a Beneficial Effect on a Bystander