Suppose that flu shots create a positive externality equal to $20 per shot. What is the relationship between the market equilibrium output level and the efficient equilibrium output produced?
A)They are equal.
B)The market equilibrium output level is greater than the efficient equilibrium output level.
C)The market equilibrium output level is less than the efficient equilibrium output level.
D)None of the above.

Question

Suppose that flu shots create a positive externality equal to $20 per shot. What is the relationship between the market equilibrium output level and the efficient equilibrium output produced?
A)​They are equal.
B)​The market equilibrium output level is greater than the efficient equilibrium output level.
C)​The market equilibrium output level is less than the efficient equilibrium output level.
D)​None of the above.

Quizplus · Accepted Answer

The positive externality of flu shots means that the marginal social benefit (MSB) of each shot is higher than the marginal private benefit (MPB). In a market with no government intervention, the equilibrium output will be determined where the MPB equals marginal cost (MC), resulting in a lower output level than the socially efficient output where MSB equals MC. Thus, the market equilibrium output level is less than the efficient equilibrium output level.

Suppose That Flu Shots Create a Positive Externality Equal to $20