If there are significant external benefits associated with the consumption of a product, it can be said that the private benefit to the consumer ____ the relative importance of this product to society and output should ____ to move toward the efficient situation.
A)overstates; increase
B)understates; increase
C)overstates; decrease
D)understates; decrease

Question

If there are significant external benefits associated with the consumption of a product, it can be said that the private benefit to the consumer ____ the relative importance of this product to society and output should ____ to move toward the efficient situation.
A)​overstates; increase
B)​understates; increase
C)​overstates; decrease
D)​understates; decrease

Quizplus · Accepted Answer

When there are significant external benefits associated with the consumption of a product, the private benefit to the consumer may not accurately reflect the true benefit to society as a whole. In other words, the private benefit may "understate" the overall benefit to society. As a result, output should "increase" to move toward an efficient situation where the overall benefit to society is maximized.

If There Are Significant External Benefits Associated with the Consumption