When the production of a good has an external cost, the
A) equilibrium quantity in an unregulated, competitive market has a marginal social cost less than the marginal social benefit.
B) equilibrium quantity in an unregulated, competitive market has a marginal social cost greater than the marginal social benefit.
C) marginal social cost curve lies below the marginal private cost curve.
D) marginal social benefit curve lies above the marginal private benefit curve.

Question

Quizplus · Accepted Answer

When a good's production incurs an external cost, it means that not all costs are accounted for in the market price. Therefore, more of the good is produced and consumed than is socially optimal, leading to a situation where the marginal social cost (which includes external costs) is greater than the marginal social benefit at the equilibrium quantity in an unregulated, competitive market.

When the Production of a Good Has an External Cost