Figure 5-5 Figure 5-5 shows a market with an externality. The current market equilibrium output of Q 1 is not the economically efficient output. The economically efficient output is Q 2 . -Refer to Figure 5-5. Suppose the current market equilibrium output of Q₁ is not the economically efficient output because of an externality. The economically efficient output is Q₂. In that case, diagram shows A) the effect of a subsidy granted to producers of a good. B) the effect of an excess demand in a market. C) the effect of a positive externality in the consumption of a good. D) the effect of a negative externality in the consumption of a good.

Question

Quizplus · Accepted Answer

The economically efficient output being greater than the current market equilibrium output suggests a positive externality, where the social benefit exceeds the private benefit, leading to underconsumption at Q1.

Figure 5-5 Figure 5-5 Shows a Market with an Externality