If the purchase of a good involves a positive externality, then the equilibrium quantity that is purchased in a free market is _____ than socially optimal, and the equilibrium price is _____ than socially optimal.

Question

Quizplus · Accepted Answer

When a good has a positive externality, it means that its consumption or production benefits third parties who are not directly involved in the transaction. In a free market, these external benefits are not taken into account, leading to a lower quantity being produced and consumed than what would be socially optimal. The price is also lower than the socially optimal price because the market does not account for the external benefits in the price mechanism.

If the Purchase of a Good Involves a Positive Externality