Scenario: The production of a good creates a negative externality. The following figure shows the market for this good.

-Refer to the scenario above.The socially optimal price for this good is ________,while the market price of it is equal to ________.
A) $14; $10
B) $20; $10
C) $20; $14
D) $14; $20

Question

Scenario: The production of a good creates a negative externality. The following figure shows the market for this good.
 
-Refer to the scenario above.The socially optimal price for this good is ________,while the market price of it is equal to ________.
A) $14; $10 
B) $20; $10 
C) $20; $14 
D) $14; $20

Quizplus · Accepted Answer

The socially optimal price is where the demand curve intersects the social cost curve, which is at a price of $20 in this case. The market price, where the demand curve intersects the supply curve, is at a price of $14. Thus, the socially optimal price is higher than the market price due to the negative externality, and the best choice is C.

Scenario: the Production of a Good Creates a Negative Externality