Suppose that one firm produces a product that results in negative external costs to society. This information suggests that
A) resources are under-allocated to the firm.
B) the equilibrium market price of the product includes the external costs borne by society.
C) resources are over-allocated to the firm.
D) at the market price, quantity demanded is less than quantity supplied.

Question

Quizplus · Accepted Answer

Negative externalities impose costs on society that are not reflected in the market price. Therefore, the market over-allocates resources to the firm, resulting in too much of the product being produced at too low of a price. This creates a situation where the costs are borne by society rather than the producer, leading to market inefficiency.

Suppose That One Firm Produces a Product That Results in Negative