Use the following competitive market diagram for product Z to answer the question below.
Assume that the current market demand and supply curves for Z are D1 and S1. If there are substantial external benefits associated with the production of Z, then
A. an output smaller than G would improve resource allocation.
B. an output greater than G would result in a more efficient allocation of resources.
C. efficient resource allocation occurs at output G and price B because the market mechanism does not measure all benefits.
D. the government should levy a per-unit excise tax on Z to shift the demand curve to the left.
Answer: B
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