Question:
[Based on a diagram showing private and social marginal cost] If this market is an unregulated free market, then
(1) the level of output is socially optimum, but price is too low.
(2) the level of output is less than socially optimum level, but price is too low.
(3) the allocation of resources will be efficient.
(4) too much output will be produced.
(5) too little output will be produced.
Correct Answer:
(4)
Answer Explanation:
When a firm’s production causes negative externalities (like pollution), the Marginal Social Cost is higher than the Marginal Private Cost. A free market ignores these external costs, resulting in overproduction (producing too much output) relative to the socially efficient level.
Topic: Externalities Year: 2021
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