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If there are important external benefits associated with the consumption of a product:_______.
A. special excise taxes should be levied on producers of the product.
B. the market supply curve for the product lies too far to the right to provide an efficient allocation of resources.
C. the market demand curve understates the relative importance of the product and resources are therefore underallocated to its production.
D. government should enact legislation to prohibit the production of the commodity.

Sagot :

Answer:

C. the market demand curve understates the relative importance of the product and resources are therefore underallocated to its production.

Explanation:

Positive external benefits refer to third party positive side effects, above & beyond private marginal benefit to the concerned consumer.

Eg : Education - Its consumption not only affects the concerned person, but the positive trickle down to the people & society around.

Personal consumption decisions are based on : equalisation - of private marginal benefit (demand) curve & private marginal cost curve. However, goods having positive external benefits have real marginal benefit curve increased over private benefit curve, by the extent of extra marginal social benefit.

So, market demand (based on private marginal benefit) curve understates the importance of product, and resources are therefore underallocated to its production (due to undervaluation of demand).

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