If a firm's production creates detrimental externalities, then in a competitive market,

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In a competitive market, firms produce until marginal cost equals price. However, if a firm's production creates detrimental externalities, such as pollution, then the social cost is higher than the private cost. This means that the marginal social cost (MSC) is higher than the marginal private cost (MPC). Since the firm only considers MPC in its production decision, it will produce at a level where MPC equals price, which is lower than the socially optimal level. Therefore, the firm will produce at an inefficiently high level.

If a Firm's Production Creates Detrimental Externalities, Then in a Competitive