Suppose that the production of a good causes positive externalities. What will happen if the good is produced at the level at which the marginal private benefit curve meets the supply curve?

Question

Quizplus · Accepted Answer

When a good causes positive externalities, the social benefit curve is above the marginal private benefit curve. Therefore, the production level at which the marginal private benefit curve meets the supply curve is lower than the socially desirable production level. Producing at this level results in a net social benefit as the external benefits are not accounted for in the market price, and society gains from the additional benefits.

Suppose That the Production of a Good Causes Positive Externalities