Which of the following describes how a negative externality affects a competitive market?
A)The externality causes a difference between the private cost of production and the social cost.
B)The externality causes a difference between the private cost of production and the private benefit from consumption.
C)The externality causes consumer surplus to exceed producer surplus.
D)The externality causes a difference between the private cost of production and the equilibrium price.

Question

Quizplus · Accepted Answer

Negative externalities, such as pollution or traffic congestion, impose costs on third parties who are not involved in the market transaction. These costs are not accounted for in the private cost of production, which means that the social cost of production is greater than the private cost. This leads to an overproduction of the good because producers are not taking into account the full cost of producing it. As a result, the market outcome is not efficient.

Which of the Following Describes How a Negative Externality Affects