The more price elastic the demand curve, the more a competitive market will over-produce (relative to the efficient level) in the presence of a negative externality.

Question

Quizplus · Accepted Answer

A more price elastic demand curve implies that consumers are more sensitive to changes in price, meaning they are likely to reduce their purchases more in response to an increase in price due to the negative externality. This results in a smaller reduction of the negative externality through reduced demand, and a larger over-production by firms as they continue to produce at levels that are no longer socially optimal.

The More Price Elastic the Demand Curve, the More a Competitive