Which of the following statements is not correct? A

• The answer to this question is C. If external benefits are associated with the production of a good, there is an overallocation of resources in the production of that good.

When there are external benefits associated with the production of a good, that particular good is under-produced as compared to the socially optimal level. While providing a good, the producer generally compares his private marginal cost with the private marginal benefit. But when the external benefits are also included in the private benefit, it becomes the social marginal benefit which shows the benefit that the whole society gets from the good. But this social marginal benefit is always ignored when the good is being supplied in the market. In other words, if a good has external benefits, then that particular good is under-produced meaning that only limited resources are allocated towards the production of that good.