If production of an item results in negative external costs, then
A) the market price is below the socially preferred price that reflects the external costs.
B) the market price is above the socially preferred price that reflects the external costs.
C) market forces will always correct the problem.
D) the market quantity is too low from society's point of view.

Question

Quizplus · Accepted Answer

When production of an item results in negative external costs, it means that the production creates costs that are not reflected in the market price. This leads to an underpricing of the item, as the true cost to society is higher than the market price. The socially preferred price that reflects the external costs is higher than the market price, so the market price is below the socially preferred price. Therefore, choice A is the correct answer.

If Production of an Item Results in Negative External Costs