If a tin of sardines creates a noxious odor for non-sardine-eaters equivalent to $1 per tin, it follows that the market produces:
A) too few tins of sardines relative to the social optimum.
B) too many tins of sardines relative to the social optimum.
C) the socially optimal level of sardines.
D) too many or too few tins of sardines, but it is impossible to say which.

Question

Quizplus · Accepted Answer

The noxious odor is a negative externality, which means the market fails to account for the full social cost, leading to overproduction relative to the social optimum.

If a Tin of Sardines Creates a Noxious Odor for Non-Sardine-Eaters