Question:
Given in this diagram are the marginal private benefit (MPB) and marginal social benefit (MSB) curves… In the absence of government intervention, misallocation of resources is likely to occur because
(1) free market price is too high.
(2) over-production of H-J.
(3) free market output is too high.
(4) under-consumption of H-J.
(5) negative externality.
Correct Answer:
(4)
Answer Explanation:
The diagram shows the Marginal Social Benefit (MSB) curve higher than the Marginal Private Benefit (MPB) curve, indicating a positive externality. The free market stops producing where MPB = MSC (at quantity H). However, society’s optimal point is where MSB = MSC (at the higher quantity J). Because H is less than J, the free market causes under-consumption (and under-production) of the good.
Topic: Externalities Year: 2017
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