If a positive externality prevails in the market for smoke detectors, then when the market is in equilibrium,

Question

Quizplus · Accepted Answer

A positive externality means that there are benefits to society that are not fully captured by the market price. In the case of smoke detectors, a smoke detector not only benefits the owner but also the surrounding community by preventing fires from spreading. Therefore, the marginal social benefit of smoke detectors exceeds the private marginal benefit, which is reflected in the market price. In order to reach the efficient level of production, the market should produce more than the quantity where marginal private benefit equals marginal cost, which means that the marginal social cost is lower than the marginal social benefit. Therefore, choice A is the correct answer.

If a Positive Externality Prevails in the Market for Smoke