What can you conclude from the fact that a significant amount of research is being conducted into wind and solar energy?

• A. The government is discouraging investment in renewable energy sources.
• B. There are likely positive externalities associated with wind and solar energy that society values.
• C. Wind and solar energy have higher private costs than social costs.
• D. Wind and solar energy produce negative externalities that outweigh their benefits.

Answer: (B)

Verified step by step guidance

1. Step 1: Understand the concept of externalities in microeconomics. Externalities occur when a third party is affected by the production or consumption of a good or service, and these effects are not reflected in market prices.
2. Step 2: Recognize that positive externalities arise when the social benefits of a good or service exceed the private benefits received by individuals or firms. This often leads to underinvestment in those goods or services if left to the market alone.
3. Step 3: Consider why significant research into wind and solar energy is being conducted. This suggests that society values the benefits of these energy sources beyond what private firms might capture, indicating the presence of positive externalities.
4. Step 4: Analyze the options given: if wind and solar energy had higher private costs than social costs, or if they produced negative externalities outweighing benefits, research incentives would likely be different. The presence of positive externalities explains why research is encouraged or supported.
5. Step 5: Conclude that the significant research activity implies that wind and solar energy generate positive externalities that society values, motivating investment and innovation in these renewable energy sources.