If the consumption of a good generates external benefits for society as a whole, then:?

[Liz D]

A. All these answers are correct.

This is a case of external economies. The free market would operate where marginal private benefit (MPB) equals marginal cost (MC). But marginal social benefit (MSB) exceeds marginal private benefit, so society enjoys social benefits above the private benefit.

For example, education is an external economy as the social benefits exceed the private benefits. Education provides society with external benefits which the market does not recognise (e.g. people with a good education are less likely to resort to crime etc so society is better off).

To equate MSB and MPB, government can offer subsidies (create incentives to Universities to increase the number of students it accepts).

The free market output is inefficient because it has not recognised the marginal social benefit.