TutorOn by Sanath Withanage

Question:

When consumption of a certain good generates a positive externality, which of the following must be true at the market equilibrium?
(1) Marginal social benefit is less than marginal private cost.
(2) Marginal social benefit is greater than marginal private benefit.
(3) Marginal social cost is greater than marginal social benefit.
(4) Marginal social cost is less than marginal private benefit.
(5) Marginal social cost is equal to marginal social benefit.

Correct Answer:

(2)

Answer Explanation:

A positive externality in consumption means that third parties benefit from an individual’s consumption (e.g., getting a vaccine protects others). Therefore, the total benefit to society (Marginal Social Benefit) is strictly greater than the benefit to the individual consumer (Marginal Private Benefit).

Topic: Externalities Year: 2018