For a product with external benefits that is produced in a competitive,unregulated market,how can the resulting market output be described?

Question

Quizplus · Accepted Answer

In a competitive, unregulated market, producers only consider their private costs and benefits while making production decisions. As a result, the external benefits are not taken into account, and the market output will be determined where the marginal private cost (MPC) intersects with the demand (D) curve. However, the socially efficient output level should be where the marginal social benefit (MSB) equals the marginal social cost (MSC), which incorporates both private costs and external benefits. Since external benefits are not considered, MSB>MPB, and the socially efficient output level is higher than the market output level. This implies the market output level is underproducing, which leads to market failure. Therefore, the best choice is (A).

For a Product with External Benefits That Is Produced in a Competitive,unregulated