When consuming a good creates positive externalities,_____
A)the private demand for the good increases.
B)the private demand for the good decreases.
C)the private demand curve overstates the marginal social benefit of the good.
D)the private demand curve understates the marginal social benefit of the good.
E)the equilibrium quantity traded of the good increases without government intervention.

Question

Quizplus · Accepted Answer

When a good creates positive externalities, the private demand curve only takes into account the private benefit of consuming the good, and does not account for the additional benefit to society as a whole. As a result, the private demand curve understates the true marginal social benefit of the good. Therefore, the best answer is D.

When Consuming a Good Creates Positive Externalities,_____