Positive externalities lead to under supply in a market.

Question

Quizplus · Accepted Answer

Positive externalities are benefits that spill over to third parties who are not directly involved in the transaction. Since the market only takes into account the private benefits and costs, the positive externalities are not factored in and the market will under supply the good or service with positive externalities. This is because the price of the good or service is lower than its social value, leading to a market failure.

Positive Externalities Lead to Under Supply in a Market