Which of the following is true when the production of a good results in negative externalities? aThe government must produce the good. bThe private market will produce too little of the good. cThe private market price will be too low. dThe government must prevent the production of the good.
Question
Which of the following is true when the production of a good results in negative externalities? aThe government must produce the good. bThe private market will produce too little of the good. cThe private market price will be too low. dThe government must prevent the production of the good.
Solution 1
The correct answer is c. The private market price will be too low.
Here's why:
Negative externalities occur when the production or consumption of a good causes a harmful effect to a third party. In this case, the social cost (private cost + external cost) of producing the good is higher than the private cost. However, the private market only considers the private cost when setting the price, not the external cost. Therefore, the market price of the good will be lower than the socially optimal price. This leads to overproduction and overconsumption of the good, creating a market failure.
So, the statement "The private market price will be too low" is true when the production of a good results in negative externalities.
Solution 2
The correct answer is c. The private market price will be too low.
Here's why:
Negative externalities occur when the production or consumption of a good causes a harmful effect to a third party. In this case, the social cost (the cost to society) is higher than the private cost (the cost to the producer).
However, the private market only takes into account the private cost when determining the price and quantity of the good. As a result, the market price is lower than the socially optimal price (the price that would exist if the social cost was taken into account), and the quantity produced is higher than the socially optimal quantity.
Therefore, when a good has negative externalities, the private market will produce too much of the good and sell it at a price that is too low.
Similar Questions
Suppose the production of a good in a competitive market has a negative externality. Which of the following is true? a) The social marginal cost curve lies to the left of the market supply curve, and the market equilibrium quantity is less than the allocatively efficient output. b) The social marginal cost curve lies to the left of the market supply curve, and the market equilibrium quantity is at the allocatively efficient output. c) The social marginal cost curve lies to the left of the market supply curve, and the market equilibrium quantity is more than the allocatively efficient output. d) The social marginal cost curve lies to the right of the market supply curve, and the market equilibrium quantity is less than the allocatively efficient output. e) The social marginal cost curve lies to the right of the market supply curve, and the market equilibrium quantity is more than the allocatively efficient output.
If the production of a good generates a positive externality, the government can increase allocative efficiency by ataxing the producer of the good bsubsidizing the producer of the good cprosecuting firms that produce the good without proper permits dsetting a price ceiling to encourage production of the good
When a positive externality exists, the socially optimal level of output will be than that resulting from a private market.
Which of the following is the best example of a negative externality? aOil leakages from drilling platforms in the Gulf of Mexico bA decline in oil stock prices as a result of bad management cAn increase in the price of oil due to the imposition of environmental regulations dAn increase in the price of oil due to action taken by the Organization of Petroleum Exporting Countries (OPEC)
Which of the following is true of a negative externality?Group of answer choicesThe government can use subsidies to encourage firms to internalize the externality.The government must take over the production of this good so that the externality can be internalized.Some benefits accrue to a third party.Its existence always requires corrective measures by the government.Some costs are borne by a third party.
Upgrade your grade with Knowee
Get personalized homework help. Review tough concepts in more detail, or go deeper into your topic by exploring other relevant questions.