When positive externalities are present, it leads to an underallocation of resources in that area relative to that which is socially desirable.

Question

Quizplus · Accepted Answer

Positive externalities refer to benefits that are enjoyed by individuals or society as a whole, but which are not reflected in market prices. This means that individuals may not consider the full social benefits when making their consumption or production decisions. As a result, there is an underallocation of resources in areas with positive externalities, since the market does not capture the full social benefits. This is why governments may intervene to correct this market failure by providing subsidies or other incentives to encourage production/consumption of goods or services with positive externalities.

When Positive Externalities Are Present, It Leads to an Underallocation