Question

The marginal social benefit of a good that exhibits positive externalities implies: Group of answer choices The marginal social benefit equals the marginal private benefit minus the costs incurred by third parties not involved in the trade. The marginal social benefit equals the marginal private benefit plus the costs incurred by third parties not involved in the trade. The marginal social benefit equals the marginal private benefit minus the benefits received by third parties not involved in the trade. The marginal social benefit equals the marginal private benefit plus the benefits received by third parties not involved in the trade.

Answer 1

The marginal social benefit equals the marginal private benefit plus the benefits received by third parties not involved in the trade.

Step-by-step explanation:

There are two types of externalities

1. Positive externality
2. Negative externality

A good has positive externality if the benefits to third parties not involved in production is greater than the cost. an example of an activity that generates positive externality is research and development. Due to the high cost of R & D, they are usually under-produced. Government can encourage the production of activities that generate positive externality by granting subsidies.

Marginal social benefit = marginal private benefit + benefits received by third parties not involved in the trade.

A good has negative externality if the costs to third parties not involved in production is greater than the benefits. an example of an activity that generates negative externality is pollution. Pollution can be generated at little or no cost, so they are usually overproduced. Government can discourage the production of activities that generate negative externality by taxation. Taxation increases the cost of production and therefore discourages overproduction. Tax levied on externality is known as Pigouvian tax.

Government can regulate the amount of externality produced by placing an upper limit on the amount of negative externality permissible