The socially optimal level of output of a good that generates an externality occurs when _____
A)the marginal private cost of production equals marginal private revenue.
B)the firm maximizes its profits.
C)the marginal private cost of production exceeds the marginal social cost of production.
D)the marginal social cost of production equals the marginal social benefit of production.
E)the marginal private cost of the good equals the marginal social benefit of the good.

Question

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The socially optimal level of output of a good that generates an externality occurs when the marginal social cost of production equals the marginal social benefit of production. This takes into account the full cost to society, including any positive or negative externalities. Options A and E only consider private costs and benefits, while option B only considers maximizing profits without considering externalities. Option C incorrectly states that private cost exceeds social cost, when in fact, social cost includes all costs to society, including externalities.

The Socially Optimal Level of Output of a Good That