Question

Both positive and negative externalities generate the _______, which is the reduction in total surplus. Positive externalities generate the external ___________, which occurs when the third party is positively affected through production or consumption.

GFT: Benefit

DWL: Cost

DWL: Benefit

GFT: Cost

Answer 1

Answer : Option c) DWL : Benefit

When there are externalities in the market and are not accounted for that causes deadweight loss wherein the society's welfare is not maximized since the external cost or external benefit is not accounted for. This reduction in total surplus (producer and consumer) is the cause of deadweight loss.

Positive externality is a scenario when the social benefit from a product is higher than the private benefit. That means the society wants more of it, production or consumption. That is because there's an external benefit associated with it which is beneficial for the society.