If there is a negative externality, and the market output is 100 units more than the socially optimal output, then it follows that
A)the external costs associated with the negative externality are greater than the marginal private costs.
B)the external costs associated with the negative externality are less than the marginal private costs.
C)there is market failure.
D)any tax imposed on the production of the output will bring about the socially optimal output.

Question

Quizplus · Accepted Answer

If the market output is 100 units more than the socially optimal output, it means that the market is overproducing the good. This indicates a situation of market failure because the private costs of production do not reflect the full social costs of the product. Therefore, the external costs associated with the negative externality must be greater than the marginal private costs. Any tax imposed on the production would only reduce the quantity produced but may not necessarily bring about the socially optimal output, given that the level of the tax would need to be based on the amount of the external costs.

If There Is a Negative Externality, and the Market Output