When the production of a good has an external cost,the
A)marginal social cost curve lies below the marginal private cost curve.
B)marginal social benefit curve lies above the marginal private benefit curve.
C)equilibrium quantity in an unregulated,competitive market has a marginal social cost greater than the marginal social benefit.
D)equilibrium quantity in an unregulated,competitive market has a marginal social cost less than the marginal social benefit.
E)good should not be produced.

Question

Quizplus · Accepted Answer

When a good's production incurs an external cost, it means that not all costs are accounted for in the market price. Therefore, the actual cost to society (marginal social cost) is higher than what is reflected in the market (marginal private cost). In an unregulated, competitive market, this leads to overproduction of the good, where the equilibrium quantity results in a marginal social cost that is greater than the marginal social benefit. This is because the market does not internalize the external cost, leading to inefficiency.

When the Production of a Good Has an External Cost,the