Consider a country that produces only two goods: kayaks and ...

[lak]

Consider a country that produces only two goods: kayaks and coconuts. Suppose it is possible for this country to increase its production of kayaks without producing fewer coconuts. In this case, its current output combination is efficient.
 
  Indicate whether the statement is true or false

Question 2

How does a positive externality in consumption reduce economic efficiency?
 
  What will be an ideal response?

[Sierray]

Answer to Question 1

FALSE

Answer to Question 2

If there is a positive externality in consumption, people not directly involved in the consumption of the product capture some of the external benefits of the product being consumed. Since the consumer does not reap the entire benefit of consumption, the consumer's marginal benefit of consumption (the demand) is reduced. This results in the consumer consuming less of the product, leading to a market equilibrium which is less than the efficient equilibrium and resulting in a deadweight loss.