Market failure because of negative externality results in:
A) marginal social cost equal to marginal private costs.
B) marginal social cost less than marginal social benefits.
C) marginal social cost equal to marginal social benefits.
D) greater outputs and lower price than socially desirable.

Question

Quizplus · Accepted Answer

When there is a negative externality, the marginal social cost (MSC) is greater than the marginal private cost (MPC) which results in the market producing a higher quantity than socially desirable at a lower price. Thus, D is the correct option. A is incorrect because if MSC = MPC, then there are no negative externalities. B is incorrect because if MSC < MSB, then there are positive externalities. C is incorrect because if MSC = MSB, then there are no externalities at all.

Market Failure Because of Negative Externality Results In