Final answer:
When producers impose an external benefit, the good's price will be lower, and the output will be lower than what is economically efficient, due to the market not reflecting the full social benefit of the good.
Step-by-step explanation:
When the actions of the producers of a good impose an external benefit, the price of the good will be lower and output lower than would be consistent with economic efficiency. This phenomenon is tied to the concept of allocative efficiency, where the price of a good (P) is equal to the marginal cost (MC) of producing it.
In an efficient market, goods are produced up to the point where the last unit provides a benefit to society exactly equal to the cost of producing it. However, when external benefits are present, such as in the case of positive externalities, the social value of the good is higher than what is reflected in the price—consumers are willing to pay for the private benefit, not including the external benefit.
Therefore, without intervention, the market will underproduce the good relative to the economically efficient level, where social benefit equals marginal cost. This condition can be addressed by government intervention, such as subsidies to encourage greater production, which aligns the private cost with the social cost, resulting in a higher quantity produced, moving towards the allocative efficiency point.