Chapter 14R, Problem 6MCQ

To determine

The market failure which is caused by a positive externality.

Answer to Problem 6MCQ

From the available options, the correct option is deadweight loss.

Explanation of Solution

When supply and demand go out of equilibrium due to market inefficiency then it is a situation of deadweight loss. Therefore, it is the result of market failure which is caused by positive externality as the marginal social benefit is high than the social cost. Overconsumption happens in negative externality and marginal external costs are not produced by buyers in the market. The tax is negative in a positive externality and pollution in a positive externality is not a market failure.

Therefore, all options: b, c, d, and e are incorrect.

Here, the correct option is a (deadweight loss).

Economics Concept Introduction

Introduction: When the production or consumption of a product benefits the third party but it is not directly considered in the market transaction as it indirectly involves in the transactions or indirectly provides benefit to the society, then it is a positive externality such as education which directly benefits the individual but also provides benefits to society indirectly.