When the consumption of a good generates an external benefit,
A) the private benefit consumers receive from the good will be higher than the true social benefit.
B) too much of the good will tend to be produced from the viewpoint of economic efficiency.
C) the community generally suffers an exactly offsetting external cost from the production of the good.
D) the market demand curve will understate the total benefits derived from consumption of the good, and as a result, too little of it will be produced and consumed.

Question

Quizplus · Accepted Answer

When the consumption of a good generates an external benefit, the market demand curve will understate the total benefits derived from consumption of the good. This leads to too little of it being produced and consumed as producers only consider private benefits and consumers don't account for the external benefits they receive. Therefore, D is the correct choice.

When the Consumption of a Good Generates an External Benefit