To maximize social welfare in the presence of a negative externality,marginal _____ must equal marginal _____.
A)social cost; private benefit
B)private cost; external cost
C)social cost; social benefit
D)private cost; social benefit
E)social cost; external cost

Question

Quizplus · Accepted Answer

The presence of a negative externality means that the social cost exceeds the private cost. To maximize social welfare, marginal social cost (MSC) must equal marginal social benefit (MSB). This is because in the presence of a negative externality, individual decision making based on private costs and benefits will lead to overproduction and inefficiency. By equating MSC and MSB, the allocation of resources will reflect the true costs and benefits to society as a whole, leading to a more efficient outcome. Therefore, option C (social cost; social benefit) is the correct choice.

To Maximize Social Welfare in the Presence of a Negative