Question

when the consumption of a good generates an external benefit:
a. the community generally suffers an exactly offsetting external cost from the production of the good.
b. the private benefit consumers receive from the good will be higher than the true social benefit.
c. too much of the good will tend to be produced from the viewpoint of economic efficiency.
d. the market demand curve will understate the total benefits derived from consumption of the good, and as a result, too little of it will be produced and consumed.

Explanation:

When a good creates an external benefit, the market only accounts for private benefits (what consumers directly gain) in the demand curve, ignoring the additional benefits to society. This means the market demand curve understates the full social benefit. As a result, producers only supply based on private demand, leading to less production and consumption than what is economically efficient.

• Option a is wrong because external benefit does not equal an offsetting external cost.
• Option b is wrong because social benefit (private + external) is higher than private benefit.
• Option c is wrong; too little, not too much, is produced.

Answer:

d. the market demand curve will understate the total benefits derived from consumption of the good, and as a result, too little of it will be produced and consumed.