Question

question 3
a positive externality
a causes the product to be overproduced
b provides an additional benefit to market participants
c benefits consumers because it results in a lower equilibrium price
d is a benefit to a market bystander
question 4
a positive externality arises when a person engages in an activity that has
a an adverse effect on a bystander who is not compensated by the person who causes the effect
b an adverse effect on a bystander who is compensated by the person who causes the effect
c a beneficial effect on a bystander who pays the person who causes the effect
d a beneficial effect on a bystander who does not pay the person who causes the effect
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Explanation:

• Question 3:
• A positive externality is defined as a benefit that accrues to a third - party (market bystander) who is not directly involved in the production or consumption of a good or service.
• Option A is incorrect because a positive externality causes under - production (not over - production) in the absence of government intervention as the market does not account for the external benefit.
• Option B is wrong as it is not just market participants (producers and consumers directly involved) who benefit, but also bystanders.
• Option C is incorrect as the lower equilibrium price is not the key characteristic of a positive externality. The key is the benefit to a bystander.
• Question 4:
• A positive externality occurs when an activity has a beneficial effect on a bystander.
• The bystander does not pay for this benefit (unlike in a normal market transaction where payment is made for a good or service).
• Option A and B refer to negative externalities (adverse effects).
• Option C is incorrect because in a positive externality, the bystander does not pay the person causing the effect.

Answer:

Question 3: D. is a benefit to a market bystander
Question 4: D. a beneficial effect on a bystander who does not pay the person who causes the effect