Question

Because education has spillover benefits, the private market will: a. underallocate resources to education. b. overallocate resources to education. c. produce too much education. d. produce the socially optimum amount of education.

Answer 1

Answer: produce the socially optimum amount of education

Explanation:

Spillover benefits simply refers to the free benefits which are gotten by third parties due to the actions of other people.

In this case, because education has spillover benefits, the private market will produce the socially optimum amount of education. This is the equilibrium achieved based on the spillover effects from the education.

The output level that reflects all the costs and benefits associated with a transaction i.e. it is the equilibrium that would be achieved if the market outcome reflects the effect of externalities.