If the production of a good involves a negative externality, then the free-market equilibrium price is _____ than socially optimal, and the equilibrium quantity is _____ than socially optimal.

Question

Quizplus · Accepted Answer

When a good's production involves a negative externality (e.g., pollution), the market fails to account for the external costs imposed on society. As a result, the price in a free market is lower than the socially optimal price (which would include these external costs), and the quantity produced and consumed is higher than the socially optimal quantity, where the social cost equals the social benefit.

If the Production of a Good Involves a Negative Externality