The socially optimal level of output of a good with an externality occurs when
A)the marginal private costs of production are equal to marginal private revenues
B)the firm maximizes its profits
C)the consumer maximizes his or her utility
D)the marginal social cost of production equals the marginal social benefit of the good
E)the firm is making a normal profit

Question

Quizplus · Accepted Answer

The socially optimal level of output with an externality occurs when the marginal social cost of production equals the marginal social benefit of the good. This takes into account not only the private costs and benefits for the producer and consumer, but also the positive or negative externalities imposed on third parties. Only when the marginal social cost equals the marginal social benefit is the efficient level of production reached that maximizes overall social welfare.

The Socially Optimal Level of Output of a Good with an Externality