For a good whose production creates an external cost,the efficient quantity of output is
A) where the market demand curve and the market supply curve intersect.
B) where the marginal social cost curve and marginal benefit curve intersect.
C) as low as possible.
D) zero.
E) the amount of production so that the marginal social benefit exceeds the marginal social cost by as much as possible.

Question

Quizplus · Accepted Answer

The efficient quantity of output is where the marginal social cost curve and marginal benefit curve intersect because this is where the overall societal welfare is maximized. A production that creates an external cost (i.e. imposes costs on society that are not reflected in the market price) means that the marginal social cost curve is higher than the supply curve. Therefore, producing at the market equilibrium where only the supply and demand curves intersect would result in an inefficient outcome, in which the total societal cost exceeds the benefits. Optimal production occurs at the intersection of the marginal social cost and marginal benefit curves, where the marginal social benefit exceeds the marginal social cost by as much as possible.

For a Good Whose Production Creates an External Cost,the Efficient