A Negative Externality Problem

Demand for a good is given by Q = 100 - P. The private marginal cost of production is MCP = 10 + Q. There is a $10 per unit negative production externality in this situation.

-Refer to A Negative Externality Problem.According to Pigou,the socially optimal level of production is
A) 0 units.
B) 30 units.
C) 40 units.
D) 45 units.

Question

A Negative Externality Problem

Demand for a good is given by Q = 100 - P. The private marginal cost of production is MCP = 10 + Q. There is a $10 per unit negative production externality in this situation.

-Refer to A Negative Externality Problem.According to Pigou,the socially optimal level of production is
A) 0 units.
B) 30 units.
C) 40 units.
D) 45 units.

Quizplus · Accepted Answer

To find the socially optimal level of production, we need to account for the negative externality by adding it to the marginal cost. The social marginal cost (MSC) is MCP + externality = 10 + Q + 10 = 20 + Q. Set MSC equal to demand to find the optimal quantity: 100 - P = 20 + Q. Solving for Q gives Q = 40.