The greater the magnitude of the external benefits of production,
A)The larger is the deadweight loss from underproduction.
B)The greater would be the optimal subsidy.
C)The further the private market solution ignoring those benefits would deviate from the socially efficient level of output.
D)All of the above are true

Question

The greater the magnitude of the external benefits of production,
A)​The larger is the deadweight loss from underproduction.
B)​The greater would be the optimal subsidy.
C)​The further the private market solution ignoring those benefits would deviate from the socially efficient level of output.
D)​All of the above are true

Quizplus · Accepted Answer

All of the statements are true. 
A: When production is underprovided, deadweight loss occurs as the quantity produced is less than the socially efficient level, resulting in a loss of potential surplus. 
B: If the external benefits are high, the optimal subsidy required to incentivize producers to increase output to the socially efficient level would also be high. 
C: The private market may not consider the benefits to others (externalities) that arise from production, leading to an inefficient equilibrium, resulting in a deviation from the optimal level of output.

The Greater the Magnitude of the External Benefits of Production