ECONOMICS
MARKET FAILURES
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The private market equilibrium quantity is equal to the socially optimal quantity.
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The marginal private cost is greater than the marginal social cost.
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The price of the product equals the marginal social cost.
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The private market equilibrium quantity is greater than the socially optimal quantity.
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Detailed explanation-1: -Q. If the production of a good generates a negative externality, which of the following is true at the private market equilibrium? The private market equilibrium quantity is equal to the socially optimal quantity.
Detailed explanation-2: -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.
Detailed explanation-3: -Negative externality. When the producer doesn’t internalize the externality, he produces more at Qo which is the free market allocation, and external costs incurred by third parties are marked by the difference between marginal private costs (MPC) and marginal social cost (MSC).
Detailed explanation-4: -Correct answer is C. When the production of good produces negative externalities a Pigouvian tax set equal to the marginal external costs will lead to the socially optimal level of produced output.
Detailed explanation-5: -Answer and Explanation: The production or consumption of an economic good that generates a negative externality results in B. overproduction of the good and a price that is lower than marginal social cost. If the pollution externality is not corrected, then the producers do not pay the full cost of their production.