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

Question

Quizplus · Accepted Answer

Negative external costs mean that the social cost of producing the product is greater than the private cost. This implies that the market price of the product is too low, and resources are over-allocated to the industry. Therefore, the best choice is C.

Suppose That the XYZ Industry Produces a Product That Results