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.

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.

Quizplus · Accepted Answer

In the presence of a positive externality, the market tends to underproduce the good, meaning the quantity Q1 is too low. Consequently, the price P1 is higher than it would be if the externality were accounted for, leading to allocative inefficiency.

The Diagram Below Shows Demand and Supply Curves for Some