If the production of a good generates a detrimental externality, then at that level of production of the good under perfect competition,

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Quizplus · Accepted Answer

When a production process generates a detrimental externality, the social cost of production, or the marginal social cost (MSC) is greater than the private cost of production, or the marginal private cost (MPC). Under perfect competition, the market only takes into account the private cost which results in overproduction of the good. To achieve the socially optimal level of production, the production must decrease to where the MPC equals the MSC. Therefore, the correct choice is C, where MPC < MSC.

If the Production of a Good Generates a Detrimental Externality