If a negative externality exists, __________ in order for the socially optimal output to be reached.
A)supply needs to increase
B)supply needs to decrease
C)demand needs to increase
D)supply and demand both need to increase

Question

Quizplus · Accepted Answer

If a negative externality exists, it means that the production or consumption of a good or service has external costs that are not accounted for in the market price. This leads to overproduction and an inefficient allocation of resources from a societal perspective. In order to reach the socially optimal output, the supply of the good or service needs to decrease. This will result in a higher market price, which will incentivize consumers to reduce their consumption, and producers to reduce their production. The reduction in supply will eventually reach a point where the external cost is fully reflected in the market price, leading to the socially optimal output.

If a Negative Externality Exists, __________ in Order for the Socially