Suppose the external (pollution) costs of a good are $5 million, while the consumer and producer surplus from consuming the good are $2.5 million. Production of this good should be

Question

Quizplus · Accepted Answer

When the external costs ($5 million) exceed the combined consumer and producer surplus ($2.5 million), it indicates that the social costs of producing the good are greater than the social benefits. Therefore, from a welfare perspective, production should be zero to prevent a net loss to society.

Suppose the External (Pollution) Costs of a Good Are $5