Consider a product (say,tulip bulbs)that generates positive externalities when it is consumed (other people enjoy looking at them).In this case,
A)the government could tax the production of this good to improve efficiency.
B)at market equilibrium,the marginal social benefit is less than the marginal cost of producing the last unit.
C)at the market equilibrium,the output would be greater than the socially optimal amount.
D)too few tulips will be produced and consumed unless external benefits are internalized.
E)at the market equilibrium,the price is too high to be allocatively efficient.

Question

Quizplus · Accepted Answer

Since the positive externality is not reflected in the market price, the market will produce and consume too few tulips. This means that in order to reach the socially optimal level of production, external benefits must be internalized, most likely through government intervention or some form of market-based mechanism such as a subsidy. Therefore, option D is the best choice.

Consider a Product (Say,tulip Bulbs)that Generates Positive Externalities When It