When consuming a good creates positive externalities,
A)private demand increases
B)private demand decreases
C)the private demand curve overstates the marginal social benefit of the good
D)the private demand curve understates the marginal social benefit of the good
E)the equilibrium quantity increases without government intervention

Question

Quizplus · Accepted Answer

When consuming a good creates positive externalities, the private demand curve understates the marginal social benefit of the good. This means that the equilibrium quantity of the good will be lower than the socially optimal level. Therefore, government intervention, such as subsidizing the production or consumption of the good, may be necessary to achieve the socially optimal level of output.

When Consuming a Good Creates Positive Externalities