The forces of supply and demand will provide a quantity that is
A) less than the efficient quantity if a good generates external benefits.
B) more than the efficient quantity if a good generates external benefits.
C) exactly the efficient quantity if a good generates external benefits.
D) either more than or less than the efficient quantity if a good generates external benefits. It is impossible to know whether it will be too much or too little without more information.

Question

Quizplus · Accepted Answer

When a good generates external benefits, the social benefit exceeds the private benefit. Therefore, the supply curve (which represents the private cost) will understate the true cost. As a result, the equilibrium quantity will be less than the socially efficient quantity.

The Forces of Supply and Demand Will Provide a Quantity