When a positive externality is present the market will produce

Question

Quizplus · Accepted Answer

When a positive externality is present, such as when a flu shot is received, the benefits go beyond just the individual receiving the shot. The entire community benefits from the reduced spread of disease. Since the market only considers the private benefits received by the individual, it will only produce the quantity at which the marginal private benefit equals the marginal cost, which is less than the socially optimal quantity where the marginal social benefit equals the marginal cost. As a result, the market will produce too little product and charge less than a fair market value price.

When a Positive Externality Is Present the Market Will Produce