If there are significant external benefits associated with the consumption of a product, it can be said that the private benefit to the consumer understates the relative importance of this product to society. In order to move towards efficiency, what should happen to output?
A) It should decrease.
B) It should increase.
C) It should cease.
D) It should stay the same.

Question

Quizplus · Accepted Answer

Since the private benefit understates the social value, society would benefit from an increase in output. By increasing output, the external benefits associated with the consumption of the product will be better reflected in the overall value of the product to society.

If There Are Significant External Benefits Associated with the Consumption