Question

If marginal social benefit is greater than marginal private benefit:

a)Society should subsidize consumption

b)Society should tax consumption

c)Society should tax production

d)The free market results in the socially optimal quantity

Answer 1

Since when action of one individual creates benefits to others but they do not pay anything for it, then it is called positive externality.

1. Both in case of positive externality and positive externality action of action of one economic agents third party who are not involved in it. Hence the given statement is false.

2. Hence it can be said that when a good is both excludable and rival in consumption, then it is private good.

        Non-excludable means when people cannot be excluded from enjoying the goods and services.

       Public goods can be defined as those goods which are non-rival in consumption and non- excludable in nature.

It means that if people choose not to pay for a public good, then they cannot be excluded from consuming it.

When the marginal social benefit is greater than the marginal private benefits, there will be positive externalities. It means it can be positive externality when a private individual get plant a tree in front of his house but the social benefit will be more than the private benefit because more people can get benefit of fresh air.

Hence it can be said that if marginal social benefit is greater than marginal private benefit society should subsidize consumption. This is because more people will be benefitted with this.

Hence option a is the correct answer.