If the production of a good involves a negative externality, then the marginal social cost is _____ than the marginal private cost, and the equilibrium quantity produced is _____ than the socially optimal quantity.

Question

Quizplus · Accepted Answer

Negative externalities cause the marginal social cost to be higher than the marginal private cost because they impose additional costs on society that are not accounted for by the private producers. Consequently, without intervention, the equilibrium quantity produced is higher than the socially optimal quantity, as the market does not internalize the external costs.

If the Production of a Good Involves a Negative Externality