Consider the case of a positive externality with a non-zero marginal external be

Question

Consider the case of a positive externality with a non-zero marginal external benefit. In this case, which of the following statements are true? O The amount of the externality produced by the competitive equilibrium quantity will equal the Pareto optimal amount. O The amount of the externality produced by the competitive equilibrium quantity will exceed the Pareto optimal amount. 0 The amount of the externality produced by the competitive equilibrium quantity will be below the Pareto optimal amount O The competitive equilibrium allocation will be determined when private marginal costs equal social marginal benefits

Explanation / Answer

Solution: The amount of externality produced by the competitive equilibrium quantity will be below the Pareto optimal amount

Explanation: In a perfect competition it will not achieve Pareto optimality when social costs and private costs and benefits diverge.

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