When external benefits are significant:
A) market output is too low.
B) market output is too high.
C) market output is at the efficient level.
D) social surplus is maximized.

Question

Quizplus · Accepted Answer

When external benefits are significant, the benefits accruing to third parties who are not directly involved in the production or consumption of a good are not fully reflected in the market price. Therefore, the market output will be too low, and there will be an under-allocation of resources to the production of the good. This leads to a suboptimal outcome, and there is room for government intervention to correct the market failure.

When External Benefits Are Significant