Question

In the face of a positive externality, a perfectly competitive market produces less than the socially optimal quantity of output. II. If vaccinations create an external marginal benefit, the marginal social benefit of vaccinations will always exceed their private marginal benefit. III. In unregulated markets, negative externalities create deadweight losses, but positive externalities do not. IV. In the face of a negative externality, a perfectly competitive market produces more than the socially optimal quantity of output. A. I, II and IV are correct B. III only is correct C. I and III are correct D. I and IV are correct?

please prove detail i can't understand in already given question's answer.

Answer 1

Correct answer: A. I, II and IV are correct :

I. In positive externality, a perfectly competitive market produces less than the socially optimal quantity of output.

The socially optimal quantity is usually large because of the positive externality, the production of such goods is only benificial for the society. The cost of producing such goods may not be necessarily profitable , hence the quantity production which is optimal by private player of the producer is less than socially optimal quantity , hence injections to increase production like subsidies, reduction in taxes etc. are important tools.

II.If vaccination creats an external marginal benefit, the marginal social benefit of vaccination will always exceed their private marginal benefit.

This is because vaccination provides a positive externality in the market. The positive externalities adds additional external benefit .

IV.In the face of a negative externality, a perfect competitive market produces more than the socially optimal quantity of output.

This is because negative externality causes negative impacts or outcomes, hence not advisable for marginal social benefit or society, hence is discouraged via tools like high taxes, compunsations etc.

III.In unregualted market , negative externalities create dead weightloss, but positive externalities does not.

This false because positive externalities also causes dead weightloss for an unregulated market, which is increased even more.