When external or spillover benefits occur in the production of a particular product,the private market tends to provide:
A) none of the product.
B) too much of the product.
C) too little of the product.
D) the socially optimal amount of the product.

Question

Quizplus · Accepted Answer

When external or spillover benefits occur in the production of a particular product, the private market tends to provide too little of the product. This happens because the private firms only consider their private cost and private benefit while producing the product and ignore the positive externality that their product produces to the society. Therefore, the market equilibrium quantity of the product is less than the socially desirable level of output, and society is worse-off because of the market failure.

When External or Spillover Benefits Occur in the Production of a Particular