Suppose a paper mill emits noxious odors that represent a negative externality for people living near the plant. If the plant managers ignore these external effects on their neighbors, what is the efficiency character of the resulting market outcome?

Question

Quizplus · Accepted Answer

The plant generates too much paper because the managers ignore the external costs of the air pollution on the neighbors. This is an example of a negative externality, where the social cost of producing paper is higher than the private cost incurred by the plant. Since the managers do not take into account the negative impact on the neighbors, they will continue to produce paper at a level that generates more pollution than is socially optimal. As a result, the market outcome is inefficient.

Suppose a Paper Mill Emits Noxious Odors That Represent a Negative