The market fails when positive externalities exist, because society overproduces goods with positive externalities.
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For example, education can have positive externalities because an educated workforce can benefit society as a whole. Show more…
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1. If a good generates a positive externality, does the free market result in overproduction or underproduction of this good? (or is the amount produced "just right", i.e. allocatively efficient?) Explain. 2. If a good generates a negative externality, does the free market result in overproduction or underproduction of this good? (or is the amount produced "just right", i.e. allocatively efficient?) Explain.
Akash M.
1. A. If the production of a good yields a negative externality, then the social-cost curve lies (above, below) the supply curve, and the socially optimal quantity is (greater, less) than the equilibrium quantity. (Circle the correct answer for each.) B. If the production of a good yields a positive externality, then the social-value curve lies to the (left, right) of the demand curve, and the socially optimal quantity is (greater, less) than the equilibrium quantity. (Circle the correct answer for each) C. With government intervention, a market will tend to (over, under) supply products that produce positive externalities. Whereas with negative externalities, a market will tend to (over, under) supply products when there is no government intervention. (Circle the correct answer for each.)
Jennifer S.
9. According to the Coase theorem, when negative externalities are present, a market will: a. reach an efficient solution only if the negative externalities are offset by positive externalities b. reach an efficient solution if transaction costs are low and property rights are well-defined. c. reach an efficient solution only if the government intervenes in the market. d. always reach an efficient solution.
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