The socially optimal level of output of a good that generates an externality occurs when:
A)the marginal private cost of production equal 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

The socially optimal level of output of a good that generates an externality occurs when:​
A)the marginal private cost of production equal 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.

Quizplus · Accepted Answer

The socially optimal level of output occurs when the marginal social cost of production (which includes all costs, both private and external) equals the marginal social benefit of production (which includes both private and external benefits). This is because at this level, the benefits to society from producing one more unit of the good (in terms of total social surplus) are exactly equal to the costs to society from producing one more unit of the good (also in terms of total social surplus).

The Socially Optimal Level of Output of a Good That