Question

Consider a market with a positive externality. The market will tend to ________ the good because the market participants tend to ignore the ________ of their decision.

Answer 1

Consider a market with a positive externality. The market will tend to under produce the good because the market participants tend to ignore the external benefit of their decision.

Explanation:

If a favourable externality occurs, total social benefit dominates marginal private benefit.

For example, free markets will supply amounts Q at price P when looking at the education market. Including external advantages, economically productive efficiency rises to Q1.

There are less developed and packed with positive externalities than the socially desirable amount. In an unregulated market, where favorable externalities arise, consumers pay lower prices and spend less than the economically productive product.