Question

Suppose the production of a good results in negative externalities. If all costs are taken into account, then

a.output will occur at the socially optimal level.

b.the price of the product will be higher than if all costs are not taken into account.

c.more output will be produced than if all costs are not taken into account.

d.a and b

e.  a, b, and c

Answer 1

Answer : The answer is option e.

For negative externality the social marginal cost lie above the private marginal cost. In this situation if all costs are taken into account then the output become socially optimal output level. For negative externality at socially optimal output level the price level become higher than the private equilibrium price level. Again, for negative externality the socially optimal output level is lower than the private equilibrium output level. So, without taking all costs into account the equilibrium output level become higher than the socially optimal output level. Hence options a, b and c all are correct. For this reason option e is the correct answer.