Question:
In the presence of a negative production externality, the market equilibrium outcome compared to the socially optimal outcome will have:
(1) Higher price and lower quantity.
(2) Lower price and higher quantity.
(3) Higher price and higher quantity.
(4) Lower price and lower quantity.
(5) Same price and same quantity.
Correct Answer:
(2)
Answer Explanation:
A negative production externality (like pollution) means the firm ignores the external cost, leading to a lower private marginal cost. This results in the firm producing more than the social optimum (overproduction) and charging a lower price than if it paid for the damage.
Topic: Externalities Year: 2024
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