When a good causes positive external benefits to accrue to third parties, an unfettered market will
A) under-allocate resources to the good causing the benefit.
B) over-allocate resources to the good causing the benefit.
C) cause the equilibrium quantity, established before the benefit is taken into account, to be produced more efficiently.
D) eliminate such goods.

Question

Quizplus · Accepted Answer

An unfettered market will under-allocate resources to the good causing the positive external benefit because the market only takes into account private costs and benefits and fails to account for the positive effects on third parties. As a result, the market equilibrium quantity will be less than the socially optimal quantity, leading to a shortage of the good causing the benefit.

When a Good Causes Positive External Benefits to Accrue to Third