When a positive externality generated from the production of a good has not been internalized,then:
A)the socially optimal quantity of output must be larger than the market level of output.
B)the socially optimal quantity of output must be less than the market level of output.
C)the socially optimal quantity of output must be equal to the market level of output.
D)the socially optimal quantity of output can be either larger or smaller than the market level of output.

Question

Quizplus · Accepted Answer

A positive externality means that the social benefit is greater than the private benefit, and if this externality is not internalized, the market equilibrium will result in a lower level of output than the socially optimal level. Therefore, to reach the socially optimal level of output, the quantity produced must be larger than the market level of output.

When a Positive Externality Generated from the Production of a Good