ECONOMICS
MARKET FAILURES
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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social costs exceed private costs
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private benefits are greater than private costs
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production creates private benefits
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private benefits are less than social benefits
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Detailed explanation-1: -The existence of a positive externality means that marginal social benefit is greater than marginal private benefit. For example, in considering the market for education, free markets would supply quantity Q at price P. If the external benefit is included, the socially efficient output rises to quantity Q1.
Detailed explanation-2: -A positive externality exists when a benefit spills over to a third-party. Government can discourage negative externalities by taxing goods and services that generate spillover costs. Government can encourage positive externalities by subsidizing goods and services that generate spillover benefits.
Detailed explanation-3: -If social costs exceed private costs, then there are negative production externalities. If social costs are less than private costs, then there are positive production externalities. The cost or benefit of an activity to society as a whole.
Detailed explanation-4: -When there is a positive externality, SB (or, Social Benefit) is greater than the PB (or, Private Benefit). SB refers to the positive effects of economic activity on the third party or the society at large. PB refers to the positive effects of economic activity on private individuals.
Detailed explanation-5: -Inefficiency in the production and consumption of private goods can also arise when there are spillover effects, or externalities. A positive externality exists if the production and consumption of a good or service benefits a third party not directly involved in the market transaction.