Exhibit 30-5

Refer to Exhibit 30-5. If a positive externality exists, then the market ____________ output by the amount ________________.

Question

Exhibit 30-5 ​

Refer to Exhibit 30-5.  If a positive externality exists, then the market ____________ output by the amount ________________.

Quizplus · Accepted Answer

If a positive externality exists, then the market is underpricing the good. This means that the demand curve does not reflect the full benefit that the consumer will receive from consuming the good. As a result, the market will underproduce the good. Since the socially optimal level of output is where MSB=MSC, the market output will be below this level. Thus, the market output will be Q₁, while the socially optimal level of output will be Q₂. Therefore, the market underproduces by the amount Q₂-Q₁, which is represented by the shaded area in Exhibit 30-5. Thus, the correct answer is D.

Exhibit 30-5 ​ Refer to Exhibit 30-5. If a Positive Externality Exists, Then the Externality

Exhibit 30-5 Refer to Exhibit 30-5. If a Positive Externality Exists, Then the Externality