If pollution is associated with the production of some good,then

Question

Quizplus · Accepted Answer

When pollution is associated with the production of a good, the cost of production incurred by the firm (Marginal Private Cost) is less than the total cost incurred by the society (Marginal Social Cost). Therefore, the difference between marginal social cost and marginal private cost is positive (i.e. MSC - MPC > 0), leading to a negative externality. In such a situation, the optimal level of output would be where marginal social cost equals marginal social benefit, but the market equilibrium occurs where marginal private cost equals marginal social benefit, hence resulting in overproduction of the good. Therefore, policy interventions like taxes or regulations may be required to reduce pollution or incentivize firms to internalize the social cost of production.

If Pollution Is Associated with the Production of Some Good,then