In the case of either a positive or a negative externality,it will always be true that,relative to the social optimum,the
A) price will be too low.
B) price will be too high.
C) quantity will be too large.
D) demand will be too small.
E) supply will be too great.

Question

Quizplus · Accepted Answer

Both positive and negative externalities cause market outcomes to diverge from the socially optimal outcomes. In the case of positive externalities, the market underproduces the good, as individuals do not consider the beneficial effect on others. Thus, the price will be too low relative to the social optimum. In the case of negative externalities, the market overproduces the good, as individuals do not consider the harmful effect on others. Hence, the price will be too high relative to the social optimum. Therefore, choice A is the correct answer.

In the Case of Either a Positive or a Negative