After correcting an externality,the equilibrium price and quantity both rose.The externality must have been a(n)
A) negative externality.
B) positional externality.
C) prisoner's dilemma.
D) positive externality.
E) external cost.

Question

Quizplus · Accepted Answer

If both the equilibrium price and quantity increase after correcting an externality, it indicates that the marginal social benefit of the good/service is greater than its private marginal benefit. This happens in the presence of a positive externality, where the market demand curve understates the true social demand curve because individuals do not take into account the benefits they are providing to others by consuming the good/service. By correcting the externality, the true social benefits are considered, leading to an increase in both the equilibrium price and quantity.

After Correcting an Externality,the Equilibrium Price and Quantity Both Rose