Chapter 4: Problem 9

A good that provides external benefits to society has a. too few resources devoted to its production. b. too many resources devoted to its production. c. the optimal resources devoted to its production. d. not provided profits to producers of the good.

Short Answer

Expert verified

The correct answer is option a: A good that provides external benefits to society has too few resources devoted to its production. This is because external benefits lead to underproduction and inefficient allocation of resources in the private market, as the social benefits are greater than the private benefits.

Step by step solution

Understand External Benefits

External benefits occur when the production or consumption of a good positively impacts parties not directly involved in the transaction. This means that the social benefits (the benefits to society as a whole) of producing or consuming this good are greater than the private benefits (the benefits received by the individual or firm producing or consuming the good).

Analyze the Effects of External Benefits on Resource Allocation

When external benefits are present, the free market outcome does not lead to an efficient allocation of resources. This is because the social benefits of producing or consuming the good are not fully accounted for in the private market, resulting in less production or consumption of the good than would be socially optimal (i.e., the market equilibrium will be lower than the socially desirable level). Now, let's examine each option and determine which one is correct.

Option a: Too Few Resources Devoted to Its Production

This option claims that there are too few resources devoted to the production of the good with external benefits. This is true because the private market does not account for the full social benefits of producing the good, leading to lesser production than is socially optimal.

Option b: Too Many Resources Devoted to Its Production

This option asserts that too many resources are devoted to the production of the good with external benefits. This is incorrect, as goods with external benefits are underproduced in the private market due to the external benefits not being taken into account in the market equilibrium.

Option c: The Optimal Resources Devoted to Its Production

This option suggests that the optimal resources are devoted to the production of the good with external benefits. This is not true, as the market equilibrium does not account for the external benefits, leading to suboptimal resource allocation.

Option d: Not Provided Profits to Producers of the Good

This option claims that the good with external benefits does not provide profits to its producers. This statement is irrelevant and incorrect since goods with external benefits can still be profitable to produce, but the market fails to allocate the optimal amount of resources for their production due to external benefits not being accounted for in the market equilibrium. In conclusion:

Correct Answer

The correct answer is option a: a good that provides external benefits to society has too few resources devoted to its production. The presence of external benefits means that the social benefits of producing the good are greater than the private benefits, leading to underproduction and an inefficient allocation of resources in the private market.

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