If a production process generates pollution,then a competitive market will produce more of the good than is socially optimal because
A) firms take all costs into consideration.
B) firms incur all costs of production but ignore some of them.
C) firms ignore the costs of production that they do not incur.
D) firms set price equal to social marginal cost.

Question

Quizplus · Accepted Answer

In a competitive market, firms only consider the costs that they directly incur in the production process, such as labor and materials. They do not take into account the external costs of pollution, as these are borne by society as a whole. Therefore, the market will produce more of the good than is socially optimal, as the true cost of production is higher than what is reflected in the market price. Choice A is incorrect because firms do not necessarily take all costs into consideration. Choice B is incorrect because firms cannot completely ignore costs of production. Choice D is incorrect because firms generally set their prices based on their own marginal costs, not social marginal cost.

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