If Social Marginal Cost (SMC) Price (P) = Buyer's Private Marginal Benefit (MB) = Seller's Private Marginal Cost (MC) = Social Marginal Benefit (SMB), it implies that:
A)a commodity is oversupplied.
B)there is an excess demand for a commodity.
C)the socially optimal amount of a good is supplied.
D)firms are not maximizing profits.

Question

If Social Marginal Cost (SMC) > Price (P) = Buyer's Private Marginal Benefit (MB) = Seller's Private Marginal Cost (MC) = Social Marginal Benefit (SMB), it implies that:
A)a commodity is oversupplied.
B)there is an excess demand for a commodity.
C)the socially optimal amount of a good is supplied.
D)firms are not maximizing profits.

Quizplus · Accepted Answer

The condition SMC > P = MB = MC = SMB indicates that the production of a commodity is generating more costs to society than benefits, and hence the society is better off with lesser production. However, firms would not voluntarily reduce production as long as P > MC. This implies that firms are overproducing, leading to an oversupply of the commodity.