Question:
Which of the following is true when the production of a certain good results in positive externalities?
(1) The government must not produce that good.
(2) The private sector production remains less than socially desirable level.
(3) The market price of that good will be too high.
(4) The government must discourage the production of that good.
(5) Private firms will not be able to maximize profits by producing that good.
Correct Answer:
(2)
Answer Explanation:
When a good generates positive externalities, the marginal social benefit is higher than the marginal private benefit. The free market only produces up to the point where private benefit equals private cost, leading to an under-allocation of resources (producing less than the socially optimal level).
Topic: Externalities Year: 2022
Leave a Reply