In the presence of a negative externality
A) there is an overallocation of resources to production
B) the competitive equilibrium will not achieve an allocatively efficient solution
C) MSC exceeds MSB at the competitive output level
D) all of the above
E) (a) and (b) only

Question

Quizplus · Accepted Answer

In the presence of a negative externality, there is an overallocation of resources to production because the social cost exceeds the private cost, leading to a competitive equilibrium that does not achieve allocative efficiency. Additionally, the Marginal Social Cost (MSC) exceeds the Marginal Social Benefit (MSB) at the competitive output level, making all of the statements correct.

In the Presence of a Negative Externality