If there are important spillover benefits from consumption of a good,
A)government should prohibit its production.
B)taxes should be imposed on producers of the product.
C)the market demand curve for the good understates the value of the product to society and resources are therefore underallocated to its production.
D)the market demand curve for the good overstates the value of the product to society and resources are therefore overallocated to its production.

Question

If there are important spillover benefits from consumption of a good,
A)​government should prohibit its production.
B)​taxes should be imposed on producers of the product.
C)​the market demand curve for the good understates the value of the product to society and resources are therefore underallocated to its production.
D)​the market demand curve for the good overstates the value of the product to society and resources are therefore overallocated to its production.

Quizplus · Accepted Answer

Spillover benefits refer to externalities or positive impacts on other individuals or society as a whole, beyond the direct consumer of the good. These benefits are not reflected in the market price of the good and thus the market demand curve understates the true value of the good to society. As a result, resources may be underallocated to its production. To correct this market failure and ensure efficient allocation of resources, government intervention may be necessary, such as subsidizing the production of the good or providing incentives for its consumption.

If There Are Important Spillover Benefits from Consumption of a Good