If producing a good or a service creates pollution, then
A) the industry's supply curve includes the extra cost of pollution.
B) at the unregulated, competitive market equilibrium quantity, marginal social benefit is less than the equilibrium price.
C) at the unregulated, competitive market equilibrium quantity, marginal social benefit and marginal social cost are equal.
D) at the unregulated, competitive market equilibrium quantity, marginal social cost is greater than the equilibrium price.
E) an unregulated competitive market produces an efficient output.

Question

Quizplus · Accepted Answer

When producing a good or a service creates pollution, the marginal social cost (MSC) of producing the good is greater than the private cost. This means the industry's supply curve should include the extra cost of pollution, or the marginal external cost. At the unregulated, competitive market equilibrium quantity, marginal social cost is greater than the equilibrium price, or the marginal private cost. Therefore, choice D is the correct answer. An unregulated competitive market does not produce an efficient output in this case because the marginal social cost is not equal to the marginal social benefit.

If Producing a Good or a Service Creates Pollution, Then