Refer to the above supply and demand graph. In the graph, S $=$ D is the current supply and demand equilibrium $($Quantity A$)$ of this product. S$1=$ D is the optimal $($allocative$)$ supply and demand $($Quantity B$)$ from the society's perspective. The figure suggests there is $($are$)$:

Question $5$Answer

a$.$

external $($spillover$)$ benefits from the production of this product; positive externality.

b$.$

an underproduction of this good.

c$.$

an underallocation of resources toward producing this good.

d$.$

external $($spillover$)$ costs in the production of this product; negative externality.