Question

If a production process creates positive​ externalities, a competitive market produces too few positive externalities because the producer A. does not pay all the costs of the externalities. B. does not receive compensation for the externalities. C. Both A and B. D. None of the above.

Answer 1

The correct answer is option B.

Step-by-step explanation:

When there is a positive externality the social benefit to consumers will be higher than the private benefit. Positive externalities mean that the benefit of production will be earned by some third party. The firms will not be compensated for these externalities. This will lead to market failure. So, a competitive firm will produce too few positive externalities unless the firms are compensated.