Chapter 13, Problem 1SCQ

Do market demand curves reflect positive externalities? Why or why not?

To determine

The analysis whether the positive externalities are reflected on demand curve or not.

Answer to Problem 1SCQ

The market demand does not reflect or indicates the effect of positive externalities as it shows only private benefits.

Explanation of Solution

The market demand curve is not meant for reflecting the positive externalities. The reason is the nature of benefits in the positive externalities i.e. they are spillover to the parties which means that they are type of social benefits. The market demand curve indicates the private benefits of the people who are the consumer of the goods and do not show the social benefits on the curve.

Conclusion:

Thus, the positive externalities cannot be reflected on the demand curve of market.