Which of the following statements about internalising a negative production externality is LEAST correct?
A)internalising a negative production externality will cause the supply curve for the good to shift to the left
B)internalising a negative production externality will cause an industry to decrease the quantity it supplies to the market and increase the price of the good produced
C)internalising a negative production externality will cause an industry to increase the quantity it supplies to the market and decrease the price of the good produced
D)internalising a negative production externality will cause an industry to move closer to the socially optimal price and quantity of the good

Question

Quizplus · Accepted Answer

Internalising a negative production externality means that the producer who creates the externality is required to take the cost of the externality into account, thereby increasing the private cost of producing the good. This increase in private cost will cause the supply curve for the good to shift to the left, meaning that the industry will decrease the quantity it supplies to the market. However, the increase in private cost will also cause an increase in the price of the good produced. Option C is the least correct, as it suggests that internalising a negative production externality will cause an industry to increase the quantity it supplies to the market and decrease the price of the good produced, which is opposite to what happens in reality. Option D is the most correct, as it acknowledges that internalising a negative production externality will cause an industry to move closer to the socially optimal price and quantity of the good.

Which of the Following Statements About Internalising a Negative Production