Compared with the efficient outcome, the market price of a good that generates external benefits is:
A) too low.
B) too high.
C) equal to the efficient price.
D) better than the efficient price.

Question

Quizplus · Accepted Answer

When a good generates external benefits, such as education or vaccination, the social value of the good is greater than its private value. As a result, the market price will be too low because suppliers do not take into account the full social benefit of their actions. This leads to an underproduction of the good, which is not socially desirable. Therefore, the government may step in with policies to try to correct this market failure by providing subsidies or other incentives to encourage the production and consumption of the good.

Compared with the Efficient Outcome, the Market Price of a Good