If positive externalities are present in the production of a good, what will society do?
A) It will produce too much of the good, since the marginal private benefit to consumers is less than the marginal social benefit.
B) It will produce too little of the good, since the marginal private benefit to consumers is less than the marginal social benefit.
C) It will produce too little of the good, since the marginal private benefit to consumers is greater than the marginal social benefit.
D) It will produce too much of the good, since the marginal private benefit to consumers is greater than the marginal social benefit.

Question

Quizplus · Accepted Answer

When positive externalities are present, the marginal social benefit is greater than the marginal private benefit. This means that the good is undervalued by consumers who are only considering the private benefits they receive from consuming the good. As a result, society will produce too little of the good because the market price based on private benefits will not accurately reflect the true value of the good to society as a whole.

If Positive Externalities Are Present in the Production of a Good