A firm producing a smoke externality is producing
A)more than the socially optimal quantity of output.
B)less than the socially optimal quantity of output.
C)exactly the socially optimal quantity of output.
D)There is insufficient information to answer.

Question

Quizplus · Accepted Answer

A smoke externality refers to the negative effect of smoke on individuals who are not involved in the production or consumption of the good. This implies that the social cost of production is higher than the private cost incurred by the firm. Therefore, the firm will produce more than the socially optimal quantity of output, resulting in an inefficient allocation of resources.

A Firm Producing a Smoke Externality Is Producing