What happens to the market price of a good if its production involves positive externalities?

When the production of a good involves positive externalities, it creates benefits that extend beyond the immediate transaction between producers and consumers. These positive spillover effects can include things like improved public health, higher schooling outcomes, or environmental benefits that affect society as a whole.

In a market that does not account for these external benefits, the equilibrium price is determined purely by the private costs incurred by producers and the private benefits received by consumers. This leads to an output level that is lower than what would be socially optimal, where both private and external benefits are taken into account. Consequently, the market price reflects only these private factors and does not capture the additional value provided by the positive externalities.

Since the positive externalities enrich society without raising the direct costs for producers or the prices for consumers, the market price ends up being lower than the optimal price that would reflect the full economic benefits, including those external to the market transaction. In this context, a market failure occurs, leading to underproduction of goods associated with positive externalities. Therefore, the correct answer correctly captures the reality that the market price is lower than the optimal price when production generates external benefits.