If there are external or spillover benefits associated with consumption and production of a product,it can be said that the:
A) government should consider placing a special tax on producers.
B) government should consider prohibiting the production of the commodity.
C) supply curve for the product lies too far to the right to provide an efficient allocation of resources.
D) demand curve understates the total benefit from the product and resources are underallocated to its production.

Question

Quizplus · Accepted Answer

When there are external or spillover benefits associated with a product, the demand curve understates the total benefit from the product, and resources are underallocated to its production. In this case, a market failure occurs, and the government needs to intervene to promote efficiency. A possible policy response could be a subsidy to producers to increase output and achieve a more efficient allocation of resources.

If There Are External or Spillover Benefits Associated with Consumption