Question

A positive externality will not generate a deadweight loss because it generates an external benefit to bystanders in society. True or False with explanation.

Answer 1

The statement is False

The positive externality will generate a deadweight loss because it is under produced. Since the market is not allocatively efficient for the production of the good due to no government support, there is market failure as good is under produced and it creates deadweight loss. The society will benefit or the positive externality will eliminate deadweight loss, if the government enters the market and provide subsidy to consumers or to producers to produce good where it benefit society at all. Subsidy will increase the demand and will correct the market failure. Consumers will consumes more at subsidised or less price. The producers will receive market price equal to allocative productive point and the difference is paid by government to producers that will maximize production. Saying simply that positive externality will lead to socially optimum production is not correct until it is provided to society at low price, which will definitely leads to socially optimum consumption of that good or service.