Total surplus in the presence of a positive externality that has not been internalized equals:
A)consumer surplus + producer surplus - external benefit
B)consumer surplus + producer surplus + external benefit
C)consumer surplus - producer surplus - external benefit
D)consumer surplus - producer surplus + external benefit

Question

Quizplus · Accepted Answer

In the presence of a positive externality, the external benefit is not reflected in the market price, and thus the marginal social benefit exceeds the marginal private benefit. Therefore, the equilibrium quantity will be less than the socially optimal quantity, resulting in a deadweight loss. The total surplus in this situation is the sum of consumer surplus, producer surplus, and the external benefit, as all three parties benefit from the positive externality. Thus, the correct formula is: Total surplus = consumer surplus + producer surplus + external benefit.

Total Surplus in the Presence of a Positive Externality That