In the presence of positive externalities, a free market will choose a price which is too ____ and produce an output which is too ____ compared with the social optimum.

Question

Quizplus · Accepted Answer

Positive externalities lead to underproduction in a free market because not all benefits are captured by the market price, resulting in a price that is too low and an output that is too low compared to the socially optimal level.

In the Presence of Positive Externalities, a Free Market Will