The production of a good generates a foul-smelling gas which is released into air by factories producing the good.
-Refer to the scenario above. Which of the following statements is true?
A) The equilibrium quantity of the good produced in the market equals the socially optimal level.
B) The equilibrium price of the good produced in the market equals the socially optimal price.
C) The equilibrium quantity of the good produced in the market is likely to be less than the socially optimal level.
D) The equilibrium quantity of the good produced in the market is likely to exceed the socially optimal level.

Question

Quizplus · Accepted Answer

The production of the good generates a negative externality (foul-smelling gas), which means the social cost of production is higher than the private cost. This typically results in overproduction of the good relative to the socially optimal level, as the market does not account for the external costs.

The Production of a Good Generates a Foul-Smelling Gas Which