If there are external benefits or positive externalities associated with consumption and production of a product, it can be said that the:
A)government should consider placing a special tax on producers.
B)government should consider prohibiting the production of the commodity.
C)supply curve for the product lies too far to the right to provide an efficient allocation of resources.
D)demand curve understates the total benefit from the product and resources are under-allocated to its production.

Question

Quizplus · Accepted Answer

Positive externalities mean that the social benefit from the consumption and production of a product is greater than the private benefit. When the demand curve understates the total benefit from the product, it means that resources are under-allocated to its production. This results in a socially inefficient level of production. Therefore, the government should intervene in the market to incentivize the production or consumption of the product through subsidies or other policies. A tax or prohibition on the production would be counterproductive in this case.

If There Are External Benefits or Positive Externalities Associated with Consumption