Suppose that the marginal private benefit from buying an extra unit of a good is $10 and the marginal social benefit of buying the extra unit is $13. In this case, the purchase of the good involves a _____ externality, and the equilibrium quantity purchased in a free market will be ____ than socially optimal.

Question

Quizplus · Accepted Answer

Since the marginal social benefit ($13) is higher than the marginal private benefit ($10), this indicates a positive externality. In a free market, the quantity purchased will be less than the socially optimal level because the market does not account for the external benefits.

Suppose That the Marginal Private Benefit from Buying an Extra