In an unregulated market with an external benefit, the
A. quantity produced is less than the efficient quantity.
B. quantity produced is greater than the efficient quantity.
C. producer is causing pollution but not paying for it.
D. government might impose a tax to help move the market toward the efficient amount of production.
E. price charged is too high for efficiency.
The correct answer and explanation is:
The correct answer is: A. quantity produced is less than the efficient quantity.
In an unregulated market with an external benefit, such as a positive externality, the market outcome typically results in less than the efficient quantity being produced. This occurs because the benefits to society of producing the good exceed the private benefits to producers and consumers. However, these external benefits are not reflected in the market price, and thus, the producers do not receive compensation for them.
When there is an external benefit, the social value of a good or service is greater than the private value. For example, consider education or vaccinations. These goods not only benefit the individuals who consume them but also provide benefits to society, such as increased productivity or reduced disease transmission. However, in the absence of government intervention, the price paid by the consumers does not take into account these broader societal benefits.
As a result, producers may be less incentivized to produce the good at the socially optimal level. The market may underproduce the good compared to what would be considered efficient from a societal perspective. This underproduction occurs because the producers are not compensated for the external benefits, leading to a quantity produced that is less than the socially optimal amount.
To correct this market failure, government intervention may be needed. In some cases, the government could subsidize the production of goods with positive externalities to encourage more production. This could help increase the quantity produced to the efficient level, where the marginal social benefit equals the marginal cost of production.
In summary, when there is an external benefit in an unregulated market, the quantity produced is less than the efficient quantity because producers do not account for the positive effects their production has on society.