Which of the following is true when a negative external effect creates a deadweight loss?
A) The marginal benefit to consumers is above the marginal private cost of the last unit produced.
B) The marginal benefit to consumers is below the marginal social cost of the last unit produced.
C) The marginal benefit to consumers is equal to the marginal social cost of the last unit produced.
D) The marginal benefit to society is below the marginal private cost of the last unit produced.

Question

Quizplus · Accepted Answer

When a negative external effect is present, it means that the production or consumption of a good or service imposes costs on third parties that are not reflected in the market price. This leads to a situation where the marginal social cost (which includes both private costs and external costs) of producing the last unit is higher than the marginal benefit to consumers. As a result, more of the good is produced than is socially optimal, creating a deadweight loss.

Which of the Following Is True When a Negative External