Question

If positive externalities exist and production is left to the private market, then at the quantity produced,

A) MSC = MSB.
B) MSC < MSB.
C) MSC > MSB.
D) MSB = marginal external benefit.
E) MSB = 1/MSC.

Answer 1

The correct answer is B) MSC < MSB. In the presence of positive externalities, the market produces a quantity that is less than the socially optimal level.

Step-by-step explanation:

The correct answer is B) MSC < MSB.

In the presence of positive externalities, the market produces a quantity that is less than the socially optimal level. This is because the marginal social benefit (MSB) of producing an additional unit of the good is greater than the marginal private cost (MPC). However, in the private market, the decision to produce is based on marginal private benefit (MPB) and marginal private cost (MPC), where MPB is equal to MSB and MPC is equal to MSC. Since MSB is greater than MPB, MSC is less than MSB.