If a production process generates pollution,then a competitive market will
A) produce more of the good than is socially optimal.
B) produce less of the good than is socially optimal.
C) produce the socially optimal quantity of that good.
D) produce zero output.

Question

Quizplus · Accepted Answer

In a competitive market, firms will only consider their private costs of production and will not take into account the social costs of pollution. This means that the market will continue producing the good until the private marginal cost (PMC) equals the market price. However, since the PMC only reflects the private costs of production and not the external costs of pollution, the market will over-produce the good by generating pollution beyond the socially optimal level. Therefore, choice A is the correct answer.

If a Production Process Generates Pollution,then a Competitive Market Will