Generating electricity creates air pollution. This industry, if left unregulated, will produce at an inefficient market equilibrium because

Question

Quizplus · Accepted Answer

When generating electricity, air pollution is a negative externality, meaning that the cost of producing electricity is not fully borne by the industry but is shifted onto society as a whole. As a result, the marginal social cost (MSC) of producing electricity exceeds the private cost of the industry. At an unregulated market equilibrium, the industry will produce too much output, resulting in a deadweight loss (inefficiency) because the MSC exceeds the marginal social benefit (MSB). Therefore, there is a need for government intervention to regulate the industry and internalize the negative externality.

Generating Electricity Creates Air Pollution