Question

When a market experiences a positive externality,

Answer 1

Answer:

b. The demand curve does not reflect the value to society of the good.

Explanation:

An externality is a financial term alluding to an expense or advantage caused or got by an outsider. Nonetheless, the outsider has no power over the making of that cost or advantage.

An externality can either be positive or negative which can be caused by either production or consumption of a good or service. The cost or the benefit  can affect an individual or a society as a whole. A typical example of a negative externality is pollution which can cause negative cost to a third party in terms of health expenses. An example of a positive externality on the other hand is when a well educated labor force increase their productivity.

The government and local authorities can control negative externality by imposing taxes and regulation of these products. The government can also overcome negative externality by imposing subsidies on the goods that improve positive externality.

The demand curve however does not reflect the value to society of the good. It only reflects the relationship between the price and the quantity of goods consumed.