Suppose that the production of a good causes negative externalities. What will happen if the good is produced at the level at which the marginal private cost curve meets the demand curve?

Question

Quizplus · Accepted Answer

When the marginal private cost curve meets the demand curve, it represents the equilibrium level of output in a purely competitive market. However, if the good causes negative externalities, the marginal social cost curve will lie above the marginal private cost curve. This means that the true cost of production to society is higher than what the producer is paying. Therefore, the equilibrium level of output will result in a net social cost, which is the difference between the marginal social cost and the price paid by consumers.

Suppose That the Production of a Good Causes Negative Externalities