When production of a good results in an external cost,the unregulated competitive market equilibrium quantity is
A) the efficient level of output.
B) greater than the efficient level of output.
C) not zero but is less than the efficient level of output.
D) unattainable.
E) zero.

Question

Quizplus · Accepted Answer

In the presence of external costs, the market equilibrium quantity is greater than the efficient level of output. This is because in the market, the cost of production is not borne by the producer only, but also by the third party who is affected by the external cost (such as pollution). As a result, the marginal social cost (MSC) exceeds the marginal private cost (MPC), and the market equilibrium quantity is greater than the efficient level of output where MSC equals the marginal social benefit (MSB).

When Production of a Good Results in an External Cost,the