If positive externalities are present in a free market, what can be said about the marginal social benefit of production compared to marginal private benefit?

In the presence of positive externalities, the marginal social benefit of production exceeds the marginal private benefit. Positive externalities occur when a good or service provides benefits to third parties who are not directly involved in the transaction. For example, education can lead to a more informed society, benefiting individuals who did not partake in the educational process.

When producers only consider the marginal private benefit, they may not take into account the additional benefits that their production generates for others. Consequently, the marginal social benefit, which includes both the private benefits received by the producer and the additional benefits enjoyed by others, is higher than the marginal private benefit alone. This discrepancy indicates that the overall societal gains from the activity are more substantial than what the individual producer perceives, motivating a potential underproduction of goods or services that result in these positive externalities.

Recognizing this difference can help policymakers understand the need for interventions, such as subsidies or incentives, to encourage more production of goods that generate positive externalities, ultimately achieving a more socially optimal level of production.