If there is an external cost associated with the production or consumption of a good in a competitive industry,then:
A)the output of the good produced will be too small compared to its demand in the market.
B)in equilibrium,the social marginal cost of production will be greater than the private marginal benefit to the consumers.
C)private benefits derived from the consumption of the good will exceed the private cost of producing the good.
D)the efficient level of output is given by the point where the private marginal cost curve intersects the private marginal benefit curve.

Question

Quizplus · Accepted Answer

External costs lead to a situation where the social cost of production exceeds the private cost of production. In a competitive industry, firms maximize profits by equating the private marginal cost with the private marginal benefit, which leads to the production of less than the socially efficient level of output. This means that there is a deadweight loss to society due to the externality. The efficient level of output is given by the intersection of the social marginal cost curve with the demand curve. As the social cost of production is higher, the social marginal cost curve will be located above the private marginal cost curve, and the social equilibrium will give a smaller level of output than the private equilibrium. Therefore, the statement in option B is true.

If There Is an External Cost Associated with the Production