ECONOMICS (CBSE/UGC NET)

Previous
Next

ECONOMICS

MARKET FAILURES

Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
If the production of good X creates a positive externality, then from society’s perspective, the industry that produces good X tends to produce:
A
less than the socially optimal amount of good X
B
greater than the socially optimal amount of good X
C
the socially optimal amount of good X
D
a shortage of good X, unless taxed
Explanation: 

Detailed explanation-1: -When a positive externality is present, the market produces less than the socially optimal quantity of the good or service, since there is a benefit to society that is not captured by the individual.

Detailed explanation-2: -When the production or consumption of a good creates a positive externality, it is deemed a market failure because at the market quantity: The marginal social benefit exceeds the marginal social cost.

Detailed explanation-3: -When consumption of a good generates a positive externality, which of the following must be true at the market equilibrium? Marginal social benefit is less than marginal private cost.

Detailed explanation-4: -When there are positive externalities associated with the consumption of a good, we can expect the market: demand curve to lie below the social demand curve.

There is 1 question to complete.
Previous
Next