ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -Social costs grow with the level of pollution, which increases as production increases, so goods with negative externalities are overproduced when only private costs are involved and not costs incurred by others. To minimize social costs would lead to lower production levels.

Detailed explanation-2: -A firm producing a negative externality would pay its marginal private cost plus a Pigouvian tax equal to the externality, and would thus reduce its production to the socially optimal level of output, since it would be paying for the damage caused to others.

Detailed explanation-3: -A negative externality is a cost that is suffered by a third party as a consequence of an economic transaction. In a transaction, the producer and consumer are the first and second parties, and third parties include any individual, organisation, property owner, or resource that is indirectly affected.

Detailed explanation-4: -A negative externality exists when the production or consumption of a product results in a cost to a third party. Air and noise pollution are commonly cited examples of negative externalities.