A result of a positive externality in the production of a good is that
A) the price system will over-allocate resources to the production of that good or service.
B) the price system will under-allocate resources to the production of that good or service.
C) the market supply will be too high.
D) the market demand will be too high.

Question

Quizplus · Accepted Answer

A positive externality in production means that there are benefits to society that are not reflected in the market price. As a result, the price is lower than the socially optimal level, which leads to an under-allocation of resources to the production of the good. In other words, the market is not producing enough of the good to fully capture the benefits to society. Therefore, choice B is the correct answer.

A Result of a Positive Externality in the Production of a Good