If a positive externality exists in consumption, the socially optimal quantity is produced by a private market that would otherwise produce:

• A. Greater than the private market quantity
• B. Less than the private market quantity
• C. The same as the private market quantity
• D. The quantity cannot be determined

Answer: (A)

When there is a positive externality in consumption, the total benefit from an extra unit to society is greater than the benefit to the consumer alone. The private market prices and quantities reflect only private benefits and costs, so it tends to produce where private marginal benefit equals marginal cost. But because society enjoys additional benefits that aren’t paid for by buyers, the marginal social benefit exceeds the private marginal benefit, so you would want more of the good. The socially optimal quantity is therefore higher than the quantity produced by the private market. That’s why the correct choice says the socially optimal quantity is greater than what the private market would produce. The other options don’t fit because they imply no underproduction or an indeterminacy that ignores the extra social benefits.