Question

When a good has external benefits, output at the market equilibrium is too low because:

a) Social value exceeds private value and is oversupplied
b) We want more produced, but private value is higher than social value
c) A Pigouvian tax is imposed
d) Government subsidies are reduced

Answer 1

When a good has external benefits, output at the market equilibrium is too low because the social value exceeds private value and is oversupplied.

Step-by-step explanation:

When a good has external benefits, output at the market equilibrium is too low because the social value exceeds private value and is oversupplied. In this case, the private market fails to achieve efficient output because firms do not account for all costs incurred in the production of output, and consumers do not account for all benefits obtained which leads to an inefficient production level.