The diagram below shows demand and supply curves for some perfectly competitive market.
FIGURE 16-2
-Refer to Figure 16-2.Suppose that the marginal benefit curve (MB)includes all social benefits and that there is a positive externality in production.In this case, ________ for allocative efficiency.
A)P1 and Q1 are appropriate
B)the price P1 is appropriate but the quantity Q1 is too low
C)the price P1 is appropriate but the quantity Q1 is too high
D)the price P1 is too low and the quantity Q1 is too high
E)the price P1 is too high and the quantity Q1 is too low

Question

The diagram below shows demand and supply curves for some perfectly competitive market.
  FIGURE 16-2
-Refer to Figure 16-2.Suppose that the marginal benefit curve (MB)includes all social benefits and that there is a positive externality in production.In this case, ________ for allocative efficiency.
A)P1 and Q1 are appropriate 
B)the price P1 is appropriate but the quantity Q1 is too low 
C)the price P1 is appropriate but the quantity Q1 is too high 
D)the price P1 is too low and the quantity Q1 is too high 
E)the price P1 is too high and the quantity Q1 is too low

Quizplus · Accepted Answer

In the presence of a positive externality, the market tends to underproduce, meaning the quantity Q1 is too low. To achieve allocative efficiency, the price should be higher to encourage more production.

The Diagram Below Shows Demand and Supply Curves for Some