Chapter 4 - Market Failures: Public Goods and Externalities - Discussion Questions - Page 105: 4

When there are negative externalities, equilibrium output is more than the efficient output, as the good is overproduced, and too many resources are diverted to producing the good which results in negative third party effects. Thus, the divergence is between marginal social benefit/cost and marginal private benefit/cost, where social benefit/cost is lesser (leftward in relation to) the private benefit. When there are positive externalities, equilibrium output is less than the efficient output, as the good is underproduced, and too few resources are diverted to producing the good which results in positive third party effects. Thus, the divergence is between marginal social benefit/cost and marginal private benefit/cost, where social benefit/cost is more (rightward in relation to) the private benefit.

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