Learning Path
Question & Answer1
Understand Question2
Review Options3
Learn Explanation4
Explore TopicChoose the Best Answer
A
It leads to underproduction; government subsidies can encourage more production.
B
It results in overproduction; government taxes can reduce output.
C
It causes equilibrium prices to rise without affecting quantity; regulations are unnecessary.
D
It has no impact on equilibrium; the market self-corrects without intervention.
Understanding the Answer
Let's break down why this is correct
Answer
A positive externality occurs when a person's actions benefit others who do not pay for those benefits. This can lead to a market equilibrium that is less than ideal because the overall value created is higher than what the market reflects. For example, if a company invests in a park, the community enjoys cleaner air and a nicer place to relax, but the company might not get paid for these benefits. As a result, there may be too little investment in parks compared to what would be socially optimal. To address this, the government can provide subsidies or tax incentives to encourage businesses to invest in activities that create positive externalities, helping to shift the market toward a better equilibrium.
Detailed Explanation
A positive externality means that a good or service benefits others who are not paying for it. Other options are incorrect because This option suggests that a positive externality causes too much production; This choice claims that prices go up but quantity stays the same.
Key Concepts
Market Equilibrium
Positive Externalities
Government Intervention
Topic
Analyzing Market Equilibrium with Externalities
Difficulty
medium level question
Cognitive Level
understand
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