Consider a market with a positive externality in consumption. The market will te

Question

Consider a market with a positive externality in consumption. The market will tend to _____________ the good because the market participants tend to ignore the _______________of their decision.

A) under-produce; marginal social benefit (B) overproduce; marginal social cost (C) under-produce; marginal private cost ( D) under-produce; marginal private benefit (E.) overproduce; marginal social benefit

Similarly, if the price a firm charges in a perfectly competitive market is greater than its average total cost, then the firm is earning an economic profit _____ zero.

(A) equal to (B) greater than (C) less than (D) The question cannot be answered with the information provided.

Any help would be appreciated, thanks!

Explanation / Answer

Postive externality provides benefit to third party.Market tend to underproduce good because participants ignore the marginal social benefit.

If price>Average total cost,firm will earn profit greater than zero ,because profit=(P-ATC)Q

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