What happens at the market equilibrium output when production creates positive externalities?

When discussing market equilibrium output in the presence of positive externalities, it's important to understand the distinction between private benefits and social benefits. In scenarios where positive externalities occur, the actions of individuals or firms create additional benefits that spill over to third parties who are not directly involved in the transaction.

The correct choice highlights that the social benefit exceeds the private benefit. This is because the private benefit reflects only the gains experienced by the producer or consumer in a transaction, whereas the social benefit encompasses both the private benefit and the additional benefits experienced by others in society.

In a perfectly competitive market without externalities, these two benefits would align, leading to socially optimal production levels. However, when positive externalities are present, the market fails to account for the additional social benefits, resulting in a lower quantity of goods being produced and consumed than what would be socially optimal. Therefore, the implication is that, at equilibrium, there is underproduction relative to the level that would maximize societal welfare. This situation leads to inefficiencies because consumers and producers are not recognizing the full positive impact their activities have on third parties, leading to social welfare not being fully maximized.