Total surplus in the presence of a positive externality that has not been internalized:
A)is greater than total surplus when the externality is internalized.
B)is less than total surplus when the externality is internalized.
C)is the same as total surplus when the externality is internalized.
D)zero,since it has not been internalized.

Question

Quizplus · Accepted Answer

When a positive externality exists and it is not internalized, the market equilibrium will result in a lower quantity being produced than the socially optimal level. This means that the marginal social benefit (MSB) of the additional units produced is greater than the marginal private benefit (MPB). As a result, total surplus (the sum of consumer and producer surplus) will be lower than the optimal level, as some benefits are not being accounted for in the market price. When the externality is internalized, the market output level will increase, leading to a higher total surplus compared to the uninternalized externality scenario.

Total Surplus in the Presence of a Positive Externality That