Assume that production of a good imposes external costs on others. The equilibrium price will be ____ and the equilibrium quantity ____ for efficient resource allocation.
A)too high; too high.
B)too high; too low.
C)too low; too high.
D)too low, too low.

Question

Assume that production of a good imposes external costs on others. The equilibrium price will be ____ and the equilibrium quantity ____ for efficient resource allocation.
A)​too high; too high.
B)​too high; too low.
C)​too low; too high.
D)​too low, too low.

Quizplus · Accepted Answer

When production of a good imposes external costs on others, the social cost of production is higher than the private cost of production. In this case, the market is allocating too many resources to the production of the good, resulting in a higher quantity than the efficient quantity. To achieve efficient resource allocation, the government can intervene by imposing a tax on the production of the good equal to the external cost. This will increase the private cost of production, leading to a higher equilibrium price and a lower equilibrium quantity, which is the efficient quantity. Therefore, the equilibrium price will be too low and the equilibrium quantity will be too high without government intervention.

Assume That Production of a Good Imposes External Costs on Others