When the market for product X includes a negative externality,:
A)marginal social cost exceeds marginal private cost.
B)marginal private cost exceeds marginal social cost.
C)marginal social benefit exceeds marginal private benefit.
D)marginal private benefit exceeds marginal social benefit.

Question

Quizplus · Accepted Answer

A negative externality occurs when the production or consumption of a good imposes costs on third parties who are not involved in the transaction. In this case, the marginal social cost (MSC) of producing the product is higher than the marginal private cost (MPC) since it includes the cost to society of the negative externality. As a result, the market will produce too much of the product and a government intervention (such as a tax) may be necessary to internalize the externality and bring the market closer to the socially optimal level of output. A negative externality means that the production or consumption of the good imposes costs on third parties who are not directly involved in the transaction. This means that the marginal social cost of producing the good is higher than the marginal private cost, which only takes into account the cost to the producer. In other words, the production of product X imposes costs on society that are not reflected in the price paid by consumers or the costs incurred by producers. As a result, the market equilibrium will result in an overproduction of the good, and the socially optimal level of production will be lower than the market equilibrium.

When the Market for Product X Includes a Negative Externality