When a negative externality exists, _______________________ and thus _______________ intervention may be needed to achieve efficiency.

Question

Quizplus · Accepted Answer

When a negative externality exists, social costs are greater than private costs, since the cost is not only borne by the producer but also by third parties. Therefore, government intervention may be needed to internalize the external cost and achieve efficiency. Option A is incorrect because external costs can be less than private costs in certain situations. Option B is incorrect because it assumes that there are no externalities, which is not the case with a negative externality. Option C is incorrect because social costs are greater than private costs, not less.

When a Negative Externality Exists, _______________________ and Thus _______________ Intervention

When a Negative Externality Exists, _________ and Thus _ Intervention