What is the effect of an unaddressed positive externality on the relationship between equilibrium and optimal quantities?

Show Answers

The quantity at equilibrium surpasses the socially optimal quantity.The equilibrium quantity matches the socially optimal quantity.The socially optimal quantity is greater than the equilibrium quantity.The equilibrium quantity can be either higher or lower than the optimal quantity.

Explanation

When a positive externality is not internalized, the market equilibrium quantity tends to be lower than the socially optimal quantity. This happens because the benefits to third parties are not reflected in the market price, leading to underproduction relative to the optimal level.