Suppose that there is a negative externality associated with alcohol consumption in the United States (e.g., the costs of publicly funded alcoholism treatment centers). What does this negative consumption externality imply about the relationship between the demand curve for alcohol and the social marginal benefit (SMB) curve for alcohol?
A) The demand curve and the SMB curve for alcohol are identical.
B) The demand curve lies below the SMB curve for alcohol.
C) The demand curve lies above the SMB curve for alcohol.
D) The demand curve intersects the SMB curve at the market equilibrium price.

Question

Quizplus · Accepted Answer

The presence of a negative externality implies that the private benefits of consuming alcohol (reflected in the demand curve) are higher than the social benefits (reflected in the SMB curve). This means the demand curve lies above the SMB curve because it does not account for the external costs to society.

Suppose That There Is a Negative Externality Associated with Alcohol