Use the figure below to answer the following question(s). Figure 5-3 -Figure 5-3 illustrates the market for a product that generates an external benefit. D₁ is the private market demand curve, while D₂ is the demand curve including the external benefit. Which of the following is true? A) Relative to economic efficiency, output of the good will be too large and the price too low. B) Relative to economic efficiency, output of the good will be too large and the price too high. C) Relative to economic efficiency, output of the good will be too small and the price too low. D) Relative to economic efficiency, output of the good will be too small and the price too high.

Question

Quizplus · Accepted Answer

When a product generates an external benefit, the private market demand (D1) underestimates the true demand (D2) that includes the external benefit. This leads to a lower quantity produced and a lower price than what would be economically efficient.

Use the Figure Below to Answer the Following Question(s)