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does a market overproduce or underproduce when third parties enjoy a positive externalities show your answer...

does a market overproduce or underproduce when third parties enjoy a positive externalities show your answer on a supply and demand graph

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Answer #1

Market under-produces when there is a positive externality and it can be seen at price P1 and Q1 combination when market efficient outcome is achieved. At this level, MPC = MPB

Since there is a positive externality, the government gives subsidy to the produces and the supply curve shifts to the right. It is shown by the P2 and Q2 combination where price comes down and output increases. At this level, socially optimum outcome is produced.

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