The presence of a positive externality in a market leads to a(n)________.
A) underproduction of a good
B) overproduction of a good
C) gain in producer surplus
D) fall in consumer surplus

Question

Quizplus · Accepted Answer

A positive externality occurs when the consumption or production of a good or service benefits a third party who is not directly involved in the transaction. Since the market only considers the private costs and benefits of the parties directly involved in the exchange, the presence of a positive externality leads to underproduction of the good as the social benefits exceed the private benefits. This means that the market fails to allocate resources efficiently and does not produce enough of the good or service that benefits society as a whole.

The Presence of a Positive Externality in a Market Leads