Suppose the production of a good results in negative externalities. If all costs are taken into account, then
A)output will occur at the socially optimal level.
B)the price of the product will be higher than if all costs are not taken into account.
C)more output will be produced than if all costs are not taken into account.
D)a and b
E)a, b, and c

Question

Quizplus · Accepted Answer

When negative externalities are present, the market equilibrium will not be socially optimal. The socially optimal level of output occurs where the marginal social cost (MSC) equals the marginal social benefit (MSB). However, in the presence of negative externalities, the MSC is higher than the marginal private cost (MPC) because the MSC includes the external costs that are not borne by the producer. As a result, the market equilibrium will occur at a point where the MPC equals the MSB, which is to the right of the socially optimal level of output. At this point, more output will be produced than is socially optimal, and the price of the product will be lower than if all costs were taken into account.

Suppose the Production of a Good Results in Negative Externalities